Client-led IR35 status disagreement process ‘just a sop to contractors’

A client-led disagreement process in 2020’s draft IR35 rules for the private sector amounts to little more than “a sop” to contractors, which only the most valued PSCs will be offered.

Outlining this pessimistic view of the process, Lawspeed signalled that the draft’s minimum statutory requirements for the process, and HMRC guidance on it, will be widely ignored.

“Our view is that hirers will only want to get involved with this [the process] if the contractor is specifically important,” the recruitment law firm said in a statement to ContractorUK.

“This may be an existing trusted contractor who is working ‘as an employee’ in the hirer’s view – [but] there would be no need for dispute resolution in other cases.”

'Sop to contractors'

So the system to object to a client’s ‘status determination statement’ “may exist only as a sop to contractors, to try and avert criticism of HMRC’s plan,” says the firm’s Adrian Marlowe.

Contractor body IPSE says it regards the client-led disagreement process for April 2020 as responsible for “the most disappointing clauses” in the entire draft IR35 legislation.

“The idea here is that where a contractor disagrees with the client’s IR35 determination, they can appeal to the client, who will need to have some kind of process for handling such disputes.

'Merry-go-round'

“But,” continues IPSE’s Andy Chamberlain, “I am yet to meet an external stakeholder, expert or commentator who believes this will be anything other than a pointless, administratively burdensome merry-go-round that will do little to resolve any disputes.”

His reasoning is well-summed up by advisory Chartergates, which observes: “As long as the client responds with 45 days and gives reasons, the worker is stuck with the decision.”

Markel Tax agrees. “The end-client has 45 days to respond, along with its reasoning, and confirm either its original decision was correct or provide a new status determination statement.  If the client fails to do this then….they will stand as ‘fee-payer’. 

“[Yet] it is not clear if a PSC would already be paid in advance of such an appeal, or whether entering such an appeal is accepting that the PSC will not be paid until the matter is resolved. 

“Moreover, there doesn’t seem to be any teeth within the legislation to suggest that an engager might actually overturn their original decision.”

'Lacks teeth'

And an absence of any bite is indeed the problem, says Chartergates’ Matt Boddington. “The statutory dispute process is welcome, but it lacks teeth for the worker or deemed employer.”

Also sparing a thought for engagers is Julia Kermode,  chief executive of the Freelancer and Contractor Services Association.

She said: “I am enraged and shocked….that [HMRC] will be introducing a statutory client-led status disagreement process which will place significant unfair burden on clients.”

'Reservations'

In its response to the consultation on introducing the process, published alongside the draft legislation, the Revenue acknowledges “reservations about the additional work” it will create.

“They [industry respondents] particularly cited the need to create processes and train staff to deal with representations.

“Alongside this, some respondents suggested that clients did not have enough knowledge of tax and employment law to manage a status disagreement process.”

'Alternative methods'

However, the government “considers the client to be best able to understand the contractual terms and working practices of those it engages,” and that “clients are also best placed to provide responses in real time.”

But at Lawspeed, the analysis shows that even if clients do have a process for their top contractors to vent their IR35 objections, “alternative methods of engagement” would ensue.

Rather those than the client ‘putting itself in a position of potential dispute with the PSC in a drawn-out process which could result in a changed decision and, in turn, a tax risk,’ the firm says.

'Reasonable care'

The taxman sounds aware of such methods, saying in the consultation response: “Some respondents suggested that a status disagreement process would not incentivise clients to take reasonable care and suggested that clients may still make blanket determinations.

“However, some consultation responses reported that disagreement processes are already in place in many client organisations and most would expect a process, similar to the one suggested by HMRC, to take place even if this was an informal or ad hoc process.”

According to Nigel Morris of tax and business advisory MacIntyre Hudson, the Revenue would ideally step in to arbitrate if there is deadlock after 45 days...

'Impact on flexibility'

But the tax authority, recently accused by one of its former inspectors of wanting to make its job easier, doesn’t want to.

“The government does not agree that there are significant incentives for deeming individuals to be employees,” it says, adding: “A HMRC-led status disagreement process would not be able to provide decisions in real time, with a consequential impact on the flexibility of the workforce.”

At IR35 specialist Qdos Contractor, the worry based on the government’s wording is that its mind is made up even though, as Lawspeed and others allege, the entire client-led status disagreement process looks “flawed”.

Qdos CEO Seb Maley said: “The onus is now on the private sector to get ready for the arrival of these changes next April. With greater clarity over the incoming rules, private sector firms can at least focus fully on preparing for these changes, ensuring they are capable of accurately setting the tax status of contractors.”

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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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