Contractors begin new IR35 assurance process

The taxman’s move to cancel his much-criticised Business Entity Tests has forced officials to draw up new guidance on how the IR35 status of contractors in the public sector must be assessed.

Floated at the IR35 Forum, the guide reveals what the assurance process for ‘off-payroll’ staff on £220 a day (or more) for 6 months (or more) now looks like without BETs, which were a key part of it.

In fact, before the new 9-page guidance by the Cabinet Office, a contractor with a BET-score of 20 or higher meant the public sector client would agree that worker to be outside IR35.

But a BET-score lower than 20 points dictated the contractor adhere to the assurance process, as spelt out in Procurement Policy Note 07/12, which is now replaced by the new guidance.

The Cabinet Office confirms: “This replacement PPN reflects the withdrawal by HMRC, with effect from 6th April 2015, of the Business Entity Tests.”

The problem with BETs was that scores were invariably below 20, and public clients wrongly thought IR35 therefore applied; when in fact, only the assurance process should then apply.

Perhaps in a bid to simplify things for such clients’ ‘alarmingly ignorant’ HR or tax staff, said one IR35 expert last night, the Cabinet Office now offers just two options on IR35 assurance.

The PSC can either accept IR35 applies (and show a deemed employment payment calculation), or reject that it applies based “on the contract alone” said the expert, Andy Vessey.

“This may prove more beneficial” for workers, he said. “We knew the reliance on BETs to initially determine a contractor’s status was going to be removed and that is to be welcomed.

“What is interesting is that no alternative to BETs has been suggested which maybe indicates that Her Majesty’s Revenue & Customs has nothing new to offer [in place of BETs]”.

Supporting his assessment – that a contract review is now the only option for an affected PSC believing itself to be outside IR35 – is Annex A section 2a) of the guidance.

It states that a “limited company (a personal service company)” will “need to provide evidence of a contract review to say that they are outside the scope of the IR35 legislation.”

Due to it specifying “a” contract review, and then citing 20 days as a “reasonable time” for an “accountant or professional adviser” to perform it, it seems a review by HMRC is not mandatory.

But it is definitely encouraged. Departments are told they need to have “confidence in the results of any contract review… [so] the HMRC Contract Review Service may be of assistance”.

Further directing taxpayer-funded clients of contractors to HMRC’s IR35 services, which are largely unused as taxpayers tend to regard them with suspicion, the guidance says:

“If the worker feels that they are outside the scope of IR35, they will need to provide assurance, for example, following a contract review by HMRC’s independent IR35 helpline.”

A third plug for HMRC reads: “It is [a public sector] department’s responsibility to determine whether or not a worker has provided assurance…departments may seek advice from their HMRC CRM when making such determination.”

Mr Vessey, a former tax official, reflected on these three extracts from the guidance that effectively tell government staff that the taxman is their first port of call. He said:

“[With] these so-called taxation officers within public bodies, who display an alarming ignorance at times, my fear is that their default position maybe to run to HMRC.  

“However, government departments should now be unified in accepting professional non-HMRC contract reviews, such as those that Qdos provides.”

Another IR35 status expert Kate Cottrell sees the same upside for contractors: “The best news is that post-BETs; an independent IR35 contract review is now acceptable across the board.”

Indeed, previously contractors had to be advised about what to do if clients rejected reviews from a party other than HMRC – the only reviewer that the Cabinet Office exampled in its initial guidance (PPN 07/12).

“Contractors should now be prepared to give the assurance when asked,” adds Cottrell. “If they had a review before or when the contract started; it should be a fairly painless process.”

If a contractor fails to provide the assurance when asked for it, she outlined, then the client is advised in the guidance to terminate the contract and report the worker/their PSC to HMRC.

Yet in the rare instance where assurance is sought but then the contract naturally ends in the time that the contractor was given to provide assurance, reporting to HMRC is disallowed.

Similarly, the guidance states that a client “cannot make a referral to HMRC’s Tax Evasion Hotline in lieu of deciding if a worker has provided assurance.”

These clarifications about when PSC contractors cannot be reported for tax evasion suggest to one former tax inspector that too many state bodies have been ‘shopping’ their contractors.

“It reads as if some departments have not bothered to ask for an assurance and have simply referred them all to the tax hotline,” the ex- Revenue inspector said.

“Consequently, because [of the] need to keep stats on the assurance process results, they can’t do this if they have referred to the evasion hotline as HMRC cannot share [the] information [due to confidentiality].

But end-users are being given more powers not less, notably if they are “concerned that the results of a contract review… do not adequately reflect the reality of the contract.”

If a public department has such concerns, says the guidance, it “may wish to consider stipulating in advance the information a worker should disclose in a contract review.”

Mr Vessey hinted that this shows Cabinet Office officials might be overestimating the understanding civil servants tend to have about IR35 in the public sector.

He explained: “For example, the Ministry of Justice recently refused to accept that a company employing 8 employees, all working on the same contract, was still within the remit of the intermediaries legislation and insisted they provide the normal assurances.”

Editor's Note: Related Reading -

Off-payroll rules review 'a matter of national security'

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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