Government approves IR35 changes from April

The emergence of a clear timetable to reform IR35 in the public sector has reignited fears that contractors’ input is being sought on a proposal that is already a ‘done deal.’

In the autumn, a beta version of a new digital tool for public sector PSCs to test their IR35 status will be released, albeit not until “late” in the season, HMRC told ContractorUK.

Also by this autumn, all public sector departments will have to regularly review their need for contractors, including time in the role and progress in replacing them with employees.

Subsequently in December, all public departments will come up with a five-year "strategic workforce plan" which will detail skills-gaps and the contractors necessary to fill them.

Departments should also by order of the Treasury be made to review whether their off-payroll staff, notably any contractors engaged as companies, should be ‘on payroll’ and on PAYE.

And then (after April 2017), assuming the proposed IR35 changes come into force, all departments will review the calculation of tax for “a sample” of their PSC contractors, in a bid to test, monitor and maintain compliance.

New IR35 tax rules ‘will apply’

But stoking fears of a ‘done deal,’ Treasury minutes recording agreement to these contractor-centric timeframes reveal that the public sector IR35 proposal will become law.

So while it may still be open to consultation, George Osborne's IR35 proposal is now a case of 'when' not 'if.'

“After April 2017, the new tax rules announced at Budget 2016 will apply,” state the Treasury minutes, referring to the ex-chancellor's IR35 proposal. “The Treasury will consider whether changes to [departmental] guidelines [on IR35 in the public sector] are necessary.”

Except for this autumn’s IR35 tool, which is already secretly online according to a source who met with HMRC last week, these actions (and timeframes) have been explicitly accepted by the government.

They were tabled by spending watchdog the Committee of Public Accounts, which says it is unconvinced that departments are doing enough to ensure contractors pay “the right tax.”

HMRC believes its IR35 proposal is the answer. “[It] will make the engager responsible for paying and accounting for the taxes rather than just checking they have been paid,” the department said in a statement to ContractorUK.

‘A magical tool’

Intouch Accounting, a tax specialist for contractors, isn’t sure about the answer's accuracy.

“[We] cannot see how the proposals to deduct the correct taxes by the intermediary can reach the right answer based on limited information and premature assumptions,” the firm said.   

“Even if a magical tool with 20 questions can solve a problem that has conflicted advisers and taxpayers with HMRC for 16 years, the proposed mechanics of the process do not work.”

A similarly downbeat view of the tool’s prospects came yesterday from former tax inspector turned expert on IR35, Kate Cottrell, who is the co-founder of status advisory Bauer & Cottrell.

She regards the new IR35 tool as “the most challenging” aspect of the planned reform, “because no one has succeeded in creating one that does give certainty for the last 16 years.”  

Substitution, Financial Risk & Control

Another former Revenue official to have meet the tax authority in recent days about the incoming changes to IR35 is Carolyn Walsh, a director of umbrella company CWC Solutions.

Relaying her meeting to ContractorUK, Ms Walsh said she expected that the new IR35 tool would have three main elements -- Substitution, Financial Risk and Control.

But this trio will not be “fully” reflective of the way that they “have been used as defining factors [in IR35] before,” at least according to a pre-beta version Ms Walsh says she has seen.

A HMRC spokesman reflected: “We are consulting on the development of a new tool -- not ESI but a new product -- and over the summer we are asking customers about the right questions to go into the tool.”

‘Both the public and private’

Ms Walsh partly agrees: “It's been developed [already], but it's not due for BETA release until late autumn after we so-called ‘experts’ have contributed our two pence worth.”

She added: “I don't think there will be any change of plan or additional announcements in Autumn Statement 2016, yet I envisage that guidance on the IR35 tool will be heavily publicised to both the public and private sectors.”

Asked why the IR35 proposal has been sampled on the private sector, even though HMRC says it has no plans to extend it beyond the public sector, the HMRC spokesman responded:

“We have heard from both engagers and contractors that greater information and clarity would be welcome. The legal reform is about the public sector but we continue to want to hear from the private sector as this tool will help them too.”

Duncan Strike, a senior director of Intouch Accounting, believes that reading between the lines of the Revenue’s statements, including the spokesman’s, isn’t difficult to do.

“Clearly, if an assessment tool can be designed that gives unchallenged clarity to employment status [for PSCs], then it will be rapidly extended to the private sector,” he said.

‘A long way off’

Another contractor accountant, Ms Walsh, who runs Andraste Accounting Ltd agrees and thinks it is “a mistake to believe the proposals are [public] sector-specific.”

“Given HMRC's approach to its customers' attitude towards compliance, I imagine that it is expected that this learned knowledge will transfer to the private sector in time,” she says.

“If the law can be reformed to transfer PAYE debts to public sector engagers, then it is entirely possible that it can be reformed to bring private sector companies in scope. For me [though], that's a long way off”.

Indeed, to be fit for the private sector the IR35 tool must contain the decisions of 16 years of court rulings; consider roles, seniority, contractual terms and working practices across a multitude of industries, said Mr Strike.

‘Minor tweaks’

For its use in the public sector though, its programming is already underway.

“HMRC gave us various documents and charts setting out their thoughts on the questions to be used in the tool and how such things as RTI will be operated by the agencies,” said Ms Cottrell, reflecting on the latest meeting of the IR35 Forum.

She added: “It is clear that the new rules will be going ahead from April 2017, although there could be some minor tweaks.” 

When asked whether the overwhelmingly negative response from employers about the IR35 proposal is enough to make the government abandon the reform, or at least think again, the HMRC spokesman declined any answer.   

Editor’s Note: Related Reading –

Half of all public PSCs to quite over IR35 change

IR35 reform plan: last chance for you to help stop it

Public sector disapproves IR35 reform plan

IR35: Contractors ‘face 13% income drop from April’

Now, HMRC admits its IR35 fix is no silver bullet

CBI criticises taxman’s IR35 proposals

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