Government responds to IR35 petition

The government has responded to the IR35 petition about the public sector.

In an update posted above the petition, the Treasury effectively refuses to cancel the IR35 changes, and restates the reasons why they will take effect from April 6th 2017.

But for the first time, it claims that the ‘off-payroll rules’ are commonly known as IR35 whereas, in fact, it is the Intermediaries legislation that is commonly known as IR35.

The department then justifies why the changes are necessary by putting its notorious, unsubstantiated claim that 90% of PSCs are non-compliant with IR35 the other way around.

“Currently only around 10% of people who should pay tax on at least part of their company's income under these rules actually do so,” the Treasury says, phrasing HMRC’s oft-used statistic positively.

A former tax inspector was last night unimpressed, saying the statement that only 10% of contactors who should operate IR35 actually do so tells only part of the story.

“There was no estimate of the numbers of contractors who have considered IR35 and are safe for tax purposes,” said Carolyn Walsh, managing director of Andraste Accounting Ltd.

Despite also being the boss of a payroll firm, Walsh took even bigger issue with brollies claiming that “100%” of public PSCs must convert to umbrella PAYE prior to April 6th.

A glance at the Treasury’s latest wording suggests the opposite is true. “[The government] has no intention of preventing people from working through their own companies,” it claims.

But the department’s response to the IR35 petition adds that it is “crucial that public sector bodies make sure that both they and those who work for them pay the right amount of tax.”

This reasoning will not allay the fears of those who expect the IR35 changes in the public sector to be extended to the private sector, as it is presumably just as “crucial” for companies to pay the right amount of tax too.

However, parties in the contractual chain still unsure about liability under the April 6th framework might take comfort from the Treasury response to the petition, as it offers some clarity.

“Where an individual’s company is directly engaged to a public sector body, the public sector body will be responsible for determining whether or not the rules apply, and deducting any necessary employment taxes on payments to the individual’s company.

“Where this engagement takes place through an agency, the public sector body will be responsible for determining whether or not the rules apply and informing the agency of this decision, in order that any necessary employment taxes can be deducted by the agency,” it says.

The concluding part of the Treasury’s statement seems to try to view the IR35 changes through the lens of the most affected; the PSC workers themselves.

“As is currently the case, falling within the off-payroll tax rules will not change an individual’s status for employment rights as there is no direct link between employment taxes and these rights,” it says

“However, those who wish to challenge their employment status for employment rights can take their case to an employment tribunal whether or not they are classified as employed for tax purposes.”

The final words from officials include an acknowledgement that the new rules “can” potentially be “administratively demanding.” But it reassures -- HMRC has a “response”.

“An online tool that will help public sector bodies to determine whether or not the rules apply...will provide certainty and clarity”, the Treasury says.

The tool -- the Employment Status Service -- was expected to be released yesterday but it did not emerge. Anecdotal reports state that a test began but the tool buckled when 25 people used it all at once.

Others claim that respondents to the IR35 consultation, including status experts, were due to take part in a private test yesterday but, at the time of writing, they had not received a log-in for the testing phase.

The experts said they expected the tool to launch for public usage in March, implying they doubt that HMRC will get the full ESS live "before the end of February 2017," as the department has promised.

Moreover, the experts gave this assessment before yesterday's false start, however informal reports this morning suggest that the link to the private beta began being distributed by HMRC late last night, with a request for the URL not to be shared.

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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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