Contractors face IR35 limbo as Finance Bill lets ‘small’ clients stay silent
Limited company contractors won’t know if 2020’s private sector off-payroll rules are in-play, as draft IR35 legislation fails to force clients to declare if their size makes them exempt.
Issuing this alert to ContractorUK, experts said Finance Bill 2019-20 wrongly omits any clause for engagers to notify themselves as a ‘small company’ out of scope of the rules.
“The government has not heeded our call for businesses that want to use this exemption to have to let their supply chains and contractors know they are classed as ‘small’
“Without this requirement,” continued IPSE’s Andy Chamberlain, “there will be instances where contractors won’t know whether they need to worry about IR35 or not.”
'Contractors expected to guess'
So while last night QAccounting was right to say PSCs with SME clients might “welcome” the exemption, they are unlikely to welcome engagers being under no duty to say if it applies.
“Neither agencies nor off-payroll workers should be expected to guess which tax rules apply based on the silence of the end-user”, according to the REC, which opposes the exemption.
“If the government persists with a small companies exemption, those clients wishing to rely on the exemption must be obliged to declare their status”.
Another agency body agrees. “No statutory obligation on the client to notify the parties in the chain that they are small”, says APSCo, “will be problematic [commercially].”
However, Thursday’s draft IR35 legislation firming up the criteria which defines entities as ‘small’ is a positive step, according to APSCO’s Sam Hurley, who sits on the IR35 Forum.
And Markel Tax points out that to qualify as small, two of three conditions must be met -- turnover of no more than £10.2m; balance sheet of under £5.1m; no more than 50 staff.
“[But] be aware,” the firm warns, “HMRC have [now] included provisions for anti-avoidance by ensuring that subsidiaries cannot qualify as small company if they’re part of a group.”
The resulting extra pages of tax code irritate Helen Christopher, operations director at Orange Genie. But very soon, it will irritate contractors too, due to the complexity they will face.
“We’ve ended up with an even more complex set of IR35 rules than before – three sets; Public Sector 2017, Private Sector Small End-Client version; Private Sector Medium or Large End-Client version.
“I get a headache from reading the legislation and deciphering what’s going to happen when an end-client moves in and out of being ‘small,’ so goodness knows how contractors are going to manage this in just nine months’ time.”
Worse still, an end-user who resembles a small outfit might very well be within the rules due to their status, even if it has well over 50 members of staff on its payroll.
“The draft finance bill gives some welcome clarity on the definition of ‘small’ for an unincorporated body, namely the turnover limit defined in the Companies Act, currently £10.2m per annum, as well as specifying that all businesses are ‘small’ in their first year,” begins MacIntyre Hudson.
“However, this seems inequitable for incorporated businesses who are only classified as small if they meet two of the three criteria relating to turnover, assets and employees.
“An incorporated business could be caught by the new rules if they have 51 employees, where an unincorporated business wouldn't, even if it had 100 employees.”
The accounting firm is among those advisers for whom HMRC’s statements on Thursday, made for example in an updated IR35 policy note, will prove hard for them to endorse.
“[The HMRC note] states that PSCs will be better off as they will no longer have to manage their own status determinations or incur accountancy fees”, observes the FCSA.
“However what they neglect to state is the significant number of PSCs that will be worse off due to being unfairly taxed if their IR35 determination is incorrect.”
Orange Genie’s Helen Christopher reflected: “HMRC claims that as PSCs will no longer be responsible for their own IR35 determinations they will make savings on administering their PSC and so will no longer be able to claim the 5% allowance previously available to cover the costs of running the company.
“Contractors engaged by ‘small’ end-clients will retain the 5% [allowance]. This along with the suggestion that limited company contractors will no longer incur accountancy fees is just utter nonsense.”
In the same HMRC policy note, the Revenue says that the 2020 framework to change IR35 in the private sector is “not expected to have any significant macro-economic impacts.”
Matt Fryer, a director at Brookson said: “HMRC appears to be taking a naïve view that there will be no impact on the wider economy, but this is only on the basis that all hirers asses their contractors correctly by April 2020.
“[Our] research sends a warning signal that they won’t -- 45% have not yet addressed the issue and 59% are considering taking a blanket approach to all contractors.”
Julia Kermode, the FCSA’s CEO, also disputes HMRC’s ‘zero’ economic impact assessment -- made in the same document which estimates a tax yield for HMRC of £1.2m in 2020/21.
“[Actually], as a result of rolling out the new reforms…13% of PSCs will quit contracting,” she warns.
“The reforms will be devastating for the UK economy and I would urge our next new prime minister to take a sensible look and a sensible view before pressing ahead with these damaging proposals.”
But the impact on freelance professionals will be no less serious, according to Chris Bryce, the CEO of IPSE. “Many now risk being pushed into quasi-employment against their will.
“They’ll be paying into the system like employees but will be denied any of the protections which go with employment. This fundamentally undermines the principle of no taxation without rights that many people understand as the basic fairness in our system.”
Trying to tot-up that impact is accountancy firm Blick Rothenberg: “Becoming a deemed employee and subject to PAYE and NIC on their earnings, could impact the cashflow of contractors significantly.
“In addition to the pure costs associated with becoming subject to tax withholdings in the same manner as employees, they will potentially lose the ability to claim some of their wider business costs as a deduction for tax purposes, whilst still suffering from the potential negatives of being a freelancer – such as unpaid holidays and a lack of steady work.”
Robert Salter, the firm’s employment tax specialist, pointed out that the draft IR35 legislation, which contains the small company exemption but no duty on engagers to declare it, is due to be finalised by November 2019.
'More complicated than ever'
“The [IR35] rules are now more complicated than ever,” says recruitment lawyer Adrian Marlowe, chair of the Association of Recruitment Consultancies.
“It is imperative that there is an independent review of this legislation before it is implemented. There has not yet been any review by the Treasury Select Committee despite one having been planned based on evidence from ARC when the public sector rules were imposed.”
Andy Chamberlain, IPSE’s deputy policy-director also wants to see a political intervention to stop the off-payroll tax, yet it does not necessarily have to come from Boris Johnson or Jeremy Hunt.
“This is draft legislation contractors across the UK hoped would never be published,” he said. “It is not law yet, however, and there is some hope it could still be averted. Most of this hope lies in the coming changes at Number 11 Downing Street.”
Yet Mark Beal-Preston, chief commercial officer at the Optionis Group, owners of SJD Accountancy and Nixon Williams, doesn’t sound too optimistic.
“It now appears unlikely that there will be a shift in the policy or plans to implement these reforms in April 2020,” he said.
Mr Beal-Preston added: "Whilst we welcome and support any efforts to drive compliance, safeguarding the interests of true contractors and freelancers is absolutely vital to the UK economy.
"There is a very real risk that access to skills will be severely limited if people choose to turn their backs on contractors because of these changes.”