Contractor sector susses out ‘complex’ draft secondary IR35 legislation

Contractors’ recruitment agencies will be HMRC’s first port of call to collect unpaid tax from, before the next ‘relevant person’ – clients, under “complex” secondary draft IR35 laws.

Unveiled on Wednesday, the legislation requires the agency contracted to the client to pay HMRC the PSC’s PAYE/NIC liability – “the relevant contributions debt” – by day 30.

But if there is “no realistic prospect of recovery” in HMRC’s view, the off-payroll liability switches from the top agency to the client – the outfit “receiving the individual’s services.”

'Do due diligence'

This debt transfer will not occur, however, if the agency suffers “genuine business failure,” HMRC said, albeit without citing a relevant clause in the draft, law firm egos points out.

Nonetheless, clients ‘could do everything right in their IR35 determination, but if agency-one doesn’t pay the right tax, HMRC can seek to recover it from the client,’ observes the FCSA. 

“It’s therefore sensible for clients to do their due diligence on their supply-chain to ensure that the [top] agency is both compliant and financially robust,” says FCSA’s Julia Kermode.

'HMRC will pursue the whole supply chain'

So, under revised draft income tax rules, HMRC has the power to recover PAYE liabilities from a “third party” where the deemed employer (the end-user) shows two characteristics.

First, the end-user failed to deduct PAYE from the off-payroll worker’s pay, and second, recovering the sum from the end-user within a “reasonable period” is not a realistic prospect.

“The new draft legislation puts huge emphasis on the fact that HMRC will pursue the whole supply chain if there’s no realistic chance of recovery at the top,” says ir35io’s Tom Cooksey.

“This will require proper workflow, evidence of compliance on all parties and demonstrable ‘reasonable care’.

“So what highly advanced tooling have HMRC provided to facilitate this in the year 2020? CEST. A tool that gives inaccurate outcomes and provides a PDF that you can print out!”

'Some large agencies are going to get stung'

Status expert Rebecca Seeley Harris reflected: “It is no surprise that HMRC have been given the power to recover the unpaid PAYE debt from a third party - also known as a 'relevant person.'

“And so I think it highly likely that some large agencies are going to get stung by some unscrupulous fee-payers. But this is all part of HMRC’s plan of course.

“Simply -- to clean up the labour supply chain by making clients and large agencies think twice about who the fee-payer is. If they don’t, they could get lumbered with a large debt.” 

'Totally remove unknown and untested umbrellas'

Former inspector Carolyn Walsh confirms that at odds with the regulation of umbrella companies – freshly cited as a reason to delay IR35 reform, HMRC wants their obliteration.

“[The Revenue] clearly expects contractors to be switched to a third-party by hirers. Given engagers’ current reactions, it seems many do fear a PAYE debt will be transferred to them for PSCs found inside IR35.

“However, if any hirer is considering paying contractors’ invoices under deduction of PAYE, it may use an umbrella company as the feepayer or deemed employer.

“But under the draft, if the feepayer doesn’t pay over the correct amount of PAYE and there’s no chance of recovery, the debt transfers back up the chain to the top agency, then the hirer.

“This should, in time, totally remove unknown and untested umbrella companies, which will probably be used as the feepayer or the deemed employer, from the marketplace,” Walsh said.

'High risk for contractors'

More pressing for contractors, the draft also stipulates that a client’s Status Determination Statement is not valid if they have not taken ‘reasonable care’ in reaching their conclusion. 

To the FCSA, this raises the prospect that some SDSs will be little more than a statement with no legal status. At least -- they could be, cautions egos’ founder Roger Sinclair.

“In theory, yes [they could lack legal basis]," he said. "But it may be high-risk for contractors to disregard a purported SDS on the basis of a claim that it was issued without reasonable care.”

Less ambiguously, the draft explicitly says that clients who become ‘small’ during the tax year (and therefore out of the legislation’s scope), have to withdraw their SDSs.

'Contractors may need to encourage their SDS to be withdrawn'

“If they fail to do that, then they will be treated as medium or large for the tax year, and therefore within the scope of the off-payroll legislation,” advises the FCSA’s Ms Kermode.

She also told ContractorUK: “This could be important for contractors. If they expect the client to turn small in the tax year, they may need to encourage them to withdraw their SDS.

“Then, the contractor will become responsible for IR35 status. Yet if the client becomes small and doesn’t withdraw the SDS, the client retains responsibility for determining IR35 status.”

'At least now we can comment'

This aspect of the draft secondary legislation, among the many others, are open for contractors and other affected parties to respond to until Wednesday February 19th.

Comments should be emailed to HMRC’s Off-Payroll Working Team, or sent by post to Off-Payroll Working Programme, Area 3C 15, HMRC, 100 Parliament St, London SW1A 2BQ.

“At least there is now an opportunity to comment on the draft legislation,” said Seeley Harris, sounding aware the IR35 Review has no inbox. “That said, I’m not sure what good it’ll do.”

'IR35 review is pointless, just lip-service'

A contractor services provider source said of the draft: “There’s nothing wildly exciting here; it’s complex and doesn’t appear to say much new. It’s the technical detail of the reform.

“Because of that, what we take from it is this – the reforms to the off-payroll rules commonly known as IR35 are going ahead no matter what, from April 6th.”

At the Freelancer & Contractor Services Association (FCSA), its CEO Ms Kermode echoed:

“It states that the primary legislation for the off-payroll changes will be contained in the Finance Bill 2020. In other words, the changes are coming anyway despite the current ‘review’,  so the [IR35 reform] review really is pointless and just paying lip-service to….[chancellor Sajid Javid’s] pre-election promise.”

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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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