Clock is ticking to have your say on private sector IR35 reform
With the deadline for the private sector IR35 reform consultation expiring a week today, there’s one key question that needs answering before you hopefully weigh in and have your say to the consultation team, writes Helen Christopher, operations director at Orange Genie.
That question is this. What have we learned from the public sector IR35 reform roll-out, and is the contractor industry, including everyone from its genuine experts to its genuinely self-employed contractors, presenting these ‘lessons learnt’ to HMRC and HM Treasury?
In fairness to the Revenue, and thanks to the contractor press, the public sector IR35 reforms introduced in April 2017 were well-documented. But the short lead time between draft legislation and the enactment of the new law meant many agencies and contactors were caught off guard just days before the changes happened. Private sector reform of IR35 – due from April 2020 -- has seen a much longer lead time, but are we any better prepared? Agree or disagree with the tabled changes, one thing’s clear: the whole supply chain should be talking about IR35 reform now and responding to the consultation.
What doesn’t help is that the proposals underpinning private sector IR35 reform are complicated. By their own admission (see Question 8 in the consultation), even HMRC does not fully understand how “labour supply chains in the private sector are typically structured.”
The thing is; if HMRC doesn’t understand the supply chain, how can they expect other parties to comprehend and apply the myriad of rules that HMRC itself are suggesting? How can HMRC ensure that the new rules will not “impose a disproportionate administrative burden on organisations”, something they are at pains to point out throughout the consultation? Their proposals, unfortunately, do nothing to simplify matters.
Moreover, placing the responsibility for the IR35 status determination on end-clients but the liability for any unpaid taxes on any party in the supply chain that does not fulfil their obligations under the new rules, adds further complexity. And uncertainty. Surely the party responsible for the IR35 decision i.e. the end-client who heads the supply chain, should ultimately be responsible for ensuring the correct liabilities are met? End-clients and agencies should be sharing their concerns with the government today, and demanding greater clarification with regards to liabilities – for them -- from this coming April.
Meanwhile, in an attempt to ‘enforce’ reasonable care when making IR35 determinations, HMRC proposes that the client shares their reasons and results throughout the whole supply chain. The Revenue goes on to suggest that should the contractor wish to appeal the determination, the same client should have an established appeals process in place. The government believes that this is the most effective approach and would “allow organisations to tailor the process to fit in with their wider business processes, whilst maintaining a level of consistency across all organisations”.
But what HMRC appears to have failed to consider is the ability of the client to make the determination in the first place. In the public sector, we witnessed many of the government’s own departments struggle with the concepts behind determining IR35 status, and as the industry members of the last IR35 Forum meeting sound aware of, the education piece required to ensure all (non-small) private sector organisations are competent to do this is nothing short of enormous.
Ominously, blanket ‘inside IR35’ decisions were a knee-jerk reaction to the public sector IR35 reforms of 2017, with TfL first to make the move of assessing all contractors as being inside IR35 with no individual reviews. In a similar fashion, and for the private sector IR35 reforms of next year, HSBC has quietly announced that they will simply cease to engage with contractors from September 2019, by asking them to become permanently employed or engaging through an intermediary.
HSBC may believe that this short term approach will remove their need to consider IR35, but we believe there will be longer term repercussions. The public sector experience suggests that this kind of reaction leads to a diminished talent pool and a shortage of expert specialist resource to complete projects, in turn leading to increased rates and project costs.
Paradoxically, HSBC’s approach may yet prove helpful. Declaring their position on the proposed changes so early, HSBC have perhaps opened the way for others to sit and back and watch how this pans out. Expert commentators have already suggested that HSBC’s approach is too heavy-handed and is not helpful for anyone in the supply chain. IR35 experts and professional status advisers will be looking to explain why this approach is neither sensible nor an example of “reasonable care.” So we are among those who are now watching eagerly to see if -- or when -- HBSC reverse their approach. Remember, TFL reversed theirs back in February 2017.
Yet different to the public sector experience is that HSBC’s announcement has not gone unnoticed by HMRC. The bank’s announcement may have been internal but it would appear that HMRC are unhappy with the suggestion that an “insertion of an additional intermediary into the supply chain” is enough to avoid the new IR35. As our reading of the Revenue’s proposals stand, the client would remain responsible for the IR35 determination irrespective of others in the supply chain. So contractors and the bank beware -- HMRC may well take action to block inventive structures designed to avoid the new rules.
Finally, I will end largely where I began. The timing of the IR35 reform is an issue. HMRC promised a year for the private sector to plan and prepare for IR35 changing. With the consultation not closing until Tuesday May 28th, and guidance unlikely until late this summer, an April 2020 roll-out does not give a clear 12 months for parties to prepare. Economic uncertainty with a continued lack of clarity on the UK’s position post any Brexit decision surely mean any proposed changes should be delayed at least until April 2021, if not quashed altogether. Agree or disagree, it’s time you have your say but be warned, the clock is ticking.