Treasury IR35 off-payroll review offers help, of sorts, to contractor sector

The Treasury’s IR35 reform review has concluded with a big boost for contractors by proposing to end their limbo of small clients being able to stay silent about being exempt.

In fact, the government says that end-users will face a new legal duty to reply to a limited company contractor, or a recruitment agency, where they ask about the end-user’s size.

It is one of six key “changes” that the 23-page review says the government is making to “address concerns” about the April 6th off-payroll rules, and it is probably the showpiece.

'Soft-landing'

It will likely be better-received than four of the changes: re-confirmation that only post-April 6 services are hit; an HMRC re-pledge to not probe historically, a factsheet, and guidance.

The fifth change, and probably a close second to the showpiece -- and only because the new chancellor revealed it already, is that the rules will have a ‘soft-landing’ for the first year.

At the time of the Rishi Sunak’s revelation last week, the Treasury declined to say what a ‘soft landing’ for the initial 12 months from April 2020 would look like, in practice.

'The only upside'

But according to the HMT review, it means taxpayers won’t have to pay penalties for “errors relating to off-payroll” in the first year, “except in case of deliberate non-compliance.”

“The soft-landing is the only upside to this review,” believes accountant James Poyser, chief executive of inniAccounts.

“One in three contractors have already walked away from clients as a result of IR35, so clients need to use this stay of execution wisely. It's the only help they're getting from HMRC.”

'Running scared'

Another contractor tax adviser Graham Jenner, of Jenner & Co, isn’t convinced. “A light-touch on penalties for 12 months does nothing to address the underlying concerns.”

“Stakeholders main concerns [are] that end-clients are running scared and banning the use of PSCs, affecting the livelihoods of tens of thousands of contractors.”

A third contractor accountant, Patrick Gribben, points out that in the review, HMRC states it is aware that end-users are “considering” not using PSCs “who are working like employees.”

“Actually large banks have stopped engaging contractors through PSCs altogether,” the head of client services for Intouch Accounting corrected.

“As end-users, these large banks aren't making assessments, so organisations are not only disengaging from limited company workers where they work like employees.”

'Whole thing is a farce'

Others claims in the HMT review are also irking. “The whole things reads as a farce,” one tax expert said, “and it reads like only a few stakeholders expressed only a few concerns.”

The expert was referring to the use of the word “some” on page three of the review:

“The government is grateful for the contributions to the review. While there remains some opposition to this change…the reform will therefore go ahead on 6 April 2020.”

Qdos, an IR35 advisory reflected: “The government has clearly ignored calls for a genuine review into IR35 reform.

“[And the findings of the review suggest] they were simply paying lip service to appease critics.”

'No one should get excited'

Even the 12-month ‘soft-landing’ is part of that lip-service according to the advisory’s chief executive Seb Maley.

“[This] light-touch to reform for the first 12 months has been welcomed, [but] this is a red herring.

“It only applies to ‘penalties’,” he said, “not necessarily tax liability owed as a result of inaccurate IR35 determinations.”

Status specialists Bauer & Cottrell confirmed: "No one should get excited about the 'soft landing,' as this only relates to penalties for one year – it does not include the tax, NIC and there could be penalties for a further three or five years."

'Gives clarity'

So, the new statutory obligation on end-users to state (if asked) whether they are exempt from the off-payroll rules, because they pass two of three tests, is the review’s bigger win for PSCs.

And agencies. “If [end-users] don’t have to declare to recruitment agencies that they meet this definition [of a ‘small company’], then there is risk for our members,” the Recruitment & Employment Confederation said yesterday, responding to questions.

“So the [proposed] move to oblige small businesses to make this declaration gives clarity to recruitment businesses and they are less at risk of innocently falling foul of the law.”

Staffing body APSCo agrees. “The fact that all businesses now have a statutory obligation to confirm whether or not they are ‘small’ takes the onus off others in the supply chain,” it said.

Tax groups are pleased too. “Legislating to introduce a legal obligation for clients to respond to a request for information about their size will help concentrate employers’ minds,” says the ATT. “And [it will] provide some reassurance to contractors.”

'Step in the right direction'

Taken with the other changes that the HMT review proposes (or ‘recycles’ given that the factsheet, April 6th services commitment and pledge not to probe retrospectively were all known about already), the AAT’s Brian Palmer is satisfied.

“All in all, the package announced today might not be everything that everyone wanted but it’s certainly a step in the right direction,” he said.

But at inniAccounts, Mr Poyser couldn’t disagree more. “It's a shambles,” he says.

“We didn't expect HMRC to set the world on fire with the review outcomes, but we didn't expect so little. This is nothing short of an embarrassment and does nothing for the reputation of the tax authority, or this government.”

'Pre-fabricated'

DNS Associates is equally outraged. The tax consultancy’s boss Sumit Agarwal said: “This review was all pre-fabricated.

"So the new IR35 framework from April was always set to roll out despite such severe issues of implementation. It would be more sensible to wait until 2021; for HMRC’s sake too.”  

Sounding similarly suspicious, even though the HMT review commits to an “external” review of the off-payroll rules in six months’ time, Intouch’s Mr Gribben said: “ I now wonder about the benefit of the Lords Committee Review into the IR35 changes at this point, with HMRC having set out their stall before that review has concluded.”

'Enormous consequences'

Formerly of the tax authority, Bauer & Cottrell's co-founder Kate Cottrell said: "Despite some 20 new IR35-related updates to the ESM today, most of the HMT review is a regurgitation of everything they have been saying all along.

"While welcome, the newly published support for contractors as of February 27th gives just five weeks before the rules change. Government has clearly not listened to the fact that numerous contractors are leaving their assignments tomorrow – 28th February."

She added: "And we still do not have the final legislation without which there is no certainty for all those working flat out to prepare for April 6th. It is wrong of the government to tell tens of thousands [of people] to prepare for something that has such enormous consequences -- and many unintended consequences with just five weeks to go. If government is listening, then they cannot fail to hear that a delay is necessary."        

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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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