HMRC handed five IR35 reform plan alternatives
Unhappy with HMRC’s proposal to reform IR35 in the private sector by simply extending the public sector IR35 reforms of April 2017, respondents to HMRC’s Off-Payroll consultation have suggested the following instead:
1. The Record-Keeping Model
“We believe that the public sector reforms have driven non-compliance rather than addressing it, and for this reason, a different approach is needed for both public and private sectors,” says Patrick Gribben, head of client services at Intouch Accounting.
“We have proposed a solution that focuses on compliance across the supply chain using enhanced record-keeping with a legal requirement to supply the relevant information up the chain.”
2. The E-Filing Model
“[We suggest] an alternative approach whereby businesses e-file a report of payments made to PSCs, and their view of whether the PSC should be applying IR35, to HMRC on a regular basis,” says the Chartered Institute of Taxation.
“By also expanding existing questions on PSCs on workers’ tax returns this would enable HMRC to follow-up directly with the PSC to check up on whether the PSC has applied IR35 to an engagement.”
John Cullinane, the institute’s tax policy director added: “Where a PSC deliberately fails to apply IR35, a significantly increased penalty for non-compliance could be applied. This would signal HMRC’s resolve in enforcing IR35 and lead to better compliance.
“Furthermore...the worker could be made jointly liable for the PAYE/NIC that has not been accounted for. Increased penalties and the transfer of debt would concentrate the individual’s mind much more on ensuring that due attention is paid to IR35.”
3. The Co-Operative Model
“It is clear from the consultation document that HMRC regard increasing compliance and efficiency as the key focal points of their proposals,” begins Chris Mattingly, CEO of Contractor Co-operative.
“HMRC claims that the requirement to investigate individual personal service companies on a company-by-company basis is inefficient and results in duplication of effort. One might ask therefore why HMRC designed a process requiring such oversight.”
He explained: “A worker co-operative model which brings freelance workers together as employees and members of one corporate entity is an existing and creditable option which can be used to tackle non-compliance in the private sector.”
“From the perspective of HMRC, the use of a worker co-operative improves efficiency and consistency in the enquiry process as a large number of freelance workers are brought together within one corporate entity.
“The worker co-operative is responsible for assessing the individual freelance worker’s IR35 status on an assignment-by-assignment basis with relevant information being collected and retained by the co-operative and shared with HMRC to provide support for decisions made.”
4. The Default IR35 Model
“We encourage HMRC to consider other options that rely on a more traditional position,” says The Association of Recruitment Consultancies.
“[For example] that the IR35 tax rules should apply as the default, but allowing the contractor to establish otherwise for any assignment, perhaps even by using the CEST tool.”
The ARC’s Adrian Marlowe added: “When combined with a percentage payment on account by the engager, this reversal of the test retains the principle that contractor tax responsibility lies with the contractor.
“Our suggestion addresses the reasons for the extension, provides HMRC with a significant income stream to meet the claimed tax avoidance, but without the risks, confusion, lack of clarity and onerous implications of HMRC’s plan.”
5. The Enhanced Reporting and Enforcement Model
Sounding very similar to The Record-Keeping Model, the EREM is a combination of options two and three outlined by HMRC in its consultation document, says the EREM’s endorsers, the FCSA.
“[It] requires end hirers to secure their labour supply chains and maintain additional records to enable HMRC to enforce, in real time,” the Freelancer and Contractor Services Association says.
“This proposal will address the compliance challenge (as the end hirer as well as the contractor will have some “skin in the game”) and intermediaries will be required to help drive compliance as it will be in their interests commercially to do this.
“It will also allow HMRC to enforce the legislation more effectively (by targeted compliance visits to assess end client’s processes and centralised record keeping) and will not be overly burdensome to end clients, recruitment businesses and PSCs (it is now common practise for compliant businesses in the labour supply chain to carry out supplier audits and maintain preferred supplier lists based on compliance standards).
“This solution presents a more balanced answer and is likely to result in more correct assessments than we are currently seeing in the public sector.”
Julia Kermode, chief executive of the FCSA highlighted the envisioned obligations on the limited company worker. “The PSC should remain responsible for assessing IR35 status but a legal requirement for reasonable care should be introduced,” she says.
“This will remove the temptation for a contractor to simply ignore IR35 obligations or seek an uninformed opinion. The PSC would still be subject to additional tax and NIC if it hadn’t applied the IR35 rules correctly but there would be an additional penalty if it hadn’t taken reasonable care in arriving at the status decision for each assignment entered into. The PSC would have an obligation to provide the information requested by the next party up the supply chain within prescribed timescales.”