Why extending off-payroll rules isn’t IR35 reform’s only option
‘Private sector IR35 reform.’ Say it enough times – or see it written enough times – and you actually to start to believe it’s a government policy.
It’s not of course (officially, yet), and it’s worth exploring what HMRC might do if the much-warned against, simple-sounding superimposition of the April 2017 off-payroll regime doesn’t actually happen, writes former tax inspector and ex-umbrella company boss Carolyn Walsh, the founder of Andraste Accounting.
Let’s look at in enforceable, legislative terms. If the still new Chapter 10 of Part 2 of ITEPA 2003 - ‘Workers’ services provided to public sector through intermediaries’ was to be extended to the private sector, we tax experts are still in ‘guesswork land’ as to how this will be achieved.
Perhaps, we will see Chapter 11, Part 2 of ITEPA 2003 -‘Workers’ services provided to private sector through intermediaries’. This would of course require a detailed definition of the scope of this chapter, unless HMRC simply decreed that all workers provided to clients through intermediaries were in scope, allowing that nothing in this new chapter affected the operation of either Chapter 7 or Chapter 10 of this part.
'Obsolete, repealed, repurposed'
At this stage, and with HMRC staying tight-lipped, I just can’t see how the Intermediaries’ legislation, known as IR35, could be sufficiently hashed up to transfer the responsibility and liability for the operation of Chapter 8, Part 2 of ITEPA 2003 from the intermediary to the client. So what happens to IR35 -- version 2000, will it become obsolete or perhaps repurposed? Could it even be repealed in 2019?
And another question: there have been many calls for umbrella companies to be regulated, so could IR35 be ‘tweaked’ to manage this issue? Umbrella companies appear to act as employment businesses, which are defined under the Employment Agencies Act 1973 as the business of supplying people in the employment of the person carrying on the business, to act for, and under the control of, other people in any capacity.
Consider the following extract, taken from the gov.uk website. ‘If you run an employment business you’re responsible for paying the temporary work-seekers you supply. You must pay a temporary work-seeker for all the hours they work, even if you haven’t been paid by the hirer or the work-seeker hasn’t got a timesheet authorised by the hirer.’
Meantime, employment businesses are referred to as "temporary work agencies" in the Agency Workers Regulations 2010, and are otherwise frequently referred to as "agencies", "temp agencies" or "employment agencies", and the workers they supply as "agency workers". This can lead to confusion between an organisation that is acting as employment businesses and one that is truly acting as an employment agency.
None of these descriptions are a perfect fit for an umbrella company, but for tax purposes it’s different and very clear.
For tax purposes, when umbrella companies (or agencies) pay workers for services provided to clients, they are Intermediary companies and could fall within scope of IR35 by virtue of Chapter 8, Part 2, subsection (49) ITEPA 2003.
So, “Section 49, Engagements to which this Chapter applies”, where:
(a) an individual (“the worker”) personally performs, or is under an obligation personally to perform, services for another person (“the client”),
(b) the services are provided not under a contract directly between the client and the worker but under arrangements involving a third party (“the intermediary”), and
(c) the circumstances are such that, if the services were provided under a contract directly between the client and the worker, the worker would be regarded for income tax purposes as an employee of the client.
However, then notice that Section 48 (2)(a) provides that ‘Nothing in this Chapter affects the operation of Chapter 7 of this Part’, so companies which fall within the scope of agencies’ legislation need not consider IR35. Then, section 51(1) (a) provides that a condition of liability where intermediary is a company the conditions is that the worker has a material interest in the intermediary, so umbrella companies need not consider IR35.
So how could it come about the brollies do need to consider IR35? Well, a change to section 51 of the Intermediaries’ legislation would bring umbrella companies within scope; regulate their involvement and govern the calculation methods used, which will stop the issue of employer NI deductions and other employer costs becoming the issue that it is now.
Another solution to HMRC’s dilemma exists and it’s not the obvious off-payroll rule superimposition. Note, if they did this widely foreseen extension, and hirers couldn’t be bothered to consider their PSCs’ IR35 status, or they chose to adopt a zero-risk policy, would we see the same as we’ve seen in the public sector – i.e. blanket decisions being made and contractors wrongly suffering PAYE deductions at source on their limited company’s income?
The alternative solution is to extend or replicate the ‘Construction Industry Scheme,’ which would enforce a deduction against payments made to all limited company contractors to be made at source by the hirer or the fee payer.
If IR35 remains in force, the creation of (cue my working title) -- The Employment Intermediary Scheme; I’ll call it the ‘EIS’ for short, would bring agencies, umbrella companies and limited company contractors within scope of a single piece of legislation. And also importantly, due to the deductions which would be held on account, HMRC would have more control over the way that contractors operated IR35, along with other operational benefits.
The potential benefits of an EIS for contractors will be outlined by me shortly in a future article for ContractorUK. Whether it’s an EIS-style solution or not, I simply don’t think it’s going to be as straightforward as an extension to the private sector of the public sector’s off-payroll working rules. But don’t misunderstand me – the Revenue is going to do something to increase IR35 compliance. This in itself is a misnomer, because while there is more tax and NI revenue being generated from the public sector, very few in that sector are actually complying with the rules.
But if HMRC is considering a type of EIS – which to me is more likely than a national rollout of the off-payroll framework, its policy team aren’t going to be pleased with me ruining the element of surprise! Perhaps contractors will however, because to be forewarned is to be forearmed.