Why the underway IR35 Reform Review is pointless
Three HMRC-led developments of late in the off-payroll space but, writes Shyam Pattani, director at employment status advisory Chartergates, do any of them add up to anything significant for PSCs?
What we’ve been given by HMRC
Let’s tackle the last of these three. Well, we would have to agree with the consensus; there is unfortunately very little information in the factsheet to go on.
Available as a PDF, the factsheet is rather vague and does not really address any of the potential issues that contractors will face from April 6th 2020, when the new IR35 legislation takes effect in the private sector.
And those issues, very broadly, are three-fold.
It’s all change from April 6th
First, the PSC is in a rather unfortunate position because the end-client (once the legislation is enacted) will have the decision-making power. The main issue for the PSC therefore is a conclusion from the end-client that IR35 applies to a particular arrangement.
Of course, the PSC can make representations disputing the conclusion. However, there is no requirement for the end-client to alter their decision; just that the end-client considers any representations made.
If the conclusion provided is that IR35 applies to the arrangements, the next issue for the PSC is the rate of pay offered for the services due to be provided. While the draft legislation requires that the deemed employer foots the bill for Secondary Class 1 NICs on the deemed direct payment, the likelihood is that end-clients and employment agencies alike will adjust their contractual pay rates with their PSCs, to account for this additional cost (subject of course to any contractually agreed rates that extend beyond 6th April 2020).
Do nothing, as HMRC says? We wouldn’t
Third, and at this stage, PSCs should really be discussing matters with engagers to ensure those end-clients (and/or employment agencies) currently preparing for the IR35 changes are fully aware of the operational aspects of the PSC’s working arrangements. This interaction should at least ensure that end-clients make a more considered conclusion on the IR35 position.
So we would not really echo HMRC’s ‘do nothing’ guidance, which it gives in its factsheet. More reassuring about the factsheet, is that HMRC have used it to reaffirm their position on IR35 historically, in terms of them looking back at past engagements.
Where HMRC has reinforced its stance on historical enquiries
In the factsheet, the department says:
“HMRC will not use information resulting from these changes to open a new enquiry into earlier years unless there is reason to suspect fraud or criminal behaviour.”
It should be remembered that one of the issues with the existing legislation is that HMRC have to enquire into each PSC individually, and currently do not have the resource to do this. The changes to the IR35 legislation from April 6th this year will allow HMRC to approach end-clients directly and essentially consider IR35 for all PSCs engaged by each end client. This may partly solve the resource issue.
The statement in the factsheet from HMRC, italicised above, will be comforting for some, but appears to be at odds with the GlaxoSmithKline saga last year. Then, the HMRC letters received by GSK contractors gave an insight into how HMRC may well tackle such enquiries post-April 6th 2020. But it was clearly not a considered approach by HMRC and simply (and perhaps ironically), constituted a ‘blanket approach’ by the Revenue.
No definitive line under contractors’ old engagements has been drawn
The statement (above) from HMRC in its factsheet is also worded in a way to suggest that the tax authority will not use information gathered from these changes to open new enquiries into historic years. However, this perhaps does not draw a line under potential historic issues altogether, as it does not include enquiries such as aspect enquiries or random enquiries that HMRC may carry out.
Finally in relation to the historic focus of HMRC (which contractors working at the same end-client from April 6th on a new status of inside IR35 may be concerned about), it is not unheard of for HMRC to not always live up to its guarantees. There have been numerous cases that we have dealt with where HMRC have disputed the outcome of their own Check of Employment Status for Tax tool, for example.
A vague factsheet and a pointless review? What, with just 76 days to go?
Standing back from the factsheet’s detail, and with only a 11 weeks to go until the legislation is to take effect, we are surprised that HMRC are focussing their efforts both on ‘factsheets’ and a pointless review into the implementation of the IR35 changes.
As to why this review does look pointless, it is entirely because the scrutiny is confined to being around the implementation of the IR35 changes, rather than the changes themselves. The biggest issue facing PSCs is that end-clients do not have the resource to make an employment status decision for each and every engagement (as mentioned earlier). It is costly and it is also risky. And this risk for end-clients is significant as the draft legislation essentially requires these engagers to make a conclusion surrounding legal principles that even HMRC have got incorrect in approximately half the cases which the department have litigated. Therefore, no matter what changes can be made to the implementation of the rules, this underlying risk is unlikely to change for end-clients whose operations contractors – and consultancies – depend on.