Tax: Private-sector IR35 changes
Although reform of the off-payroll working rules in the private sector has been long-awaited, Donald Drysdale encourages those who might be affected to prepare for the changes.
The controversial ‘intermediaries legislation’ is more often referred to as ‘IR35’. It aims to ensure that people working through an intermediary, who would have been employees had they been engaged directly, pay broadly the same income tax and national insurance contributions (NICs) as if they were employed.
The government has long held the view that there is massive non-compliance with IR35. By contrast, most businesses and their tax advisers regard IR35 as bad legislation, widely misunderstood and misapplied by HMRC.
In April 2017 the government reformed the off-payroll working rules for public-sector engagements. Then HMRC conducted a consultation in 2018, gathering views on how best to address what they saw as non-compliance with IR35 in the private sector.
A new consultation was launched on 5 March, inviting feedback on certain aspects of proposals scheduled to take effect from 6 April 2020.
Using the public-sector rules as a starting point, private-sector clients will have to determine a worker’s employment status and communicate that determination. In addition, the fee-payer (usually the organisation paying the worker’s intermediary) will need to account for income tax and employer’s and employee’s NICs.
Scope of the reforms
Large and medium-sized companies – broadly as defined for Companies Act purposes – will be affected by the reforms and will need to determine the status of each off-payroll worker they engage.
HMRC hope to identify a simplified approach for bringing equivalent non-corporate private-sector entities within the scope of the reforms. They want to ensure that the reforms would apply consistently to the full range of entities and structures operating in the private sector.
The smallest organisations, such as small companies and those in small groups, will not be affected by the reforms and will not need to determine the status of the off-payroll workers they engage.
Note that for this purpose a company is ‘small’ in a year in which it satisfies two or more of the following requirements: annual turnover, not more than £10.2 million; balance sheet total, not more than £5.1 million; number of employees, not more than 50.
The proposed reforms of IR35 will generally adopt the existing rules for the public sector, but a degree of fine-tuning is expected.
For each engagement it is likely that the client will have to provide the determination – and on request, the reasons for it – directly to the off-payroll worker. Each recipient of such information would be required to pass it on to the next person in the contractual chain, until it eventually reaches the fee-payer.
HMRC are seeking information about typical labour supply chains in different sectors. They are keen to explore alternative methods of short-circuiting a lengthy supply chain, which might allow the fee-payer to receive the determination directly from the client.
In a case of non-compliance, liability for income tax and NICs will rest initially with the party that has failed to fulfil its obligations, until it meets those obligations. The liability will then move down the labour supply chain as each party fulfils its obligations. HMRC think that this would encourage all parties to contract with reputable, compliant firms.
Where a small private-sector organisation engages an off-payroll worker, it won’t have to determine whether the engagement is within IR35. Instead, the off-payroll worker and his intermediary will be responsible (as at present) for deciding whether IR35 applies.
Determining employment status
HMRC say that they want the off-payroll working rules to be applied properly and consistently, based on the facts of each particular engagement. Employment status for tax is determined by the contractual terms and conditions and the actual working practices of the engagement.
Responses to last year’s consultation raised concerns about the absence of a process for challenging status determinations, and fears that organisations might make blanket determinations of the employment status of multiple off-payroll workers engaged in similar roles.
HMRC suggest a two-stage solution. First, a strengthening of the existing rules requiring the client to provide the off-payroll worker and the fee-payer, on request, with the reasons for the status determination. Second, a client-led process to allow off-payroll workers and fee-payers to challenge status determinations.
HMRC believe that these arrangements will ensure that the client takes reasonable care when reaching its final view on the status determination of the engagement, and thus fewer off-payroll workers will need to use end-of-year processes to challenge the status determination.
There are concerns that HMRC’s ‘Check Employment Status for Tax’ (CEST) online tool is unable to take accurate account of case law in determining employment status, and unable to cope with the complex nature of the private sector.
HMRC aims to enhance the CEST service and improve related guidance so that organisations can confidently use it to make employment status determinations that can be relied upon. It is unclear whether this can be achieved.
Other aspects of IR35
The private-sector reforms to IR35 will follow closely the changes made in 2017 for public-sector organisations.
Where IR35 applies, the fee-payer will have to operate real time information (RTI) for tax, NICs and the apprenticeship levy in the same way as for an employee. Statutory payments and other employment rights will be unaffected by the proposed reforms.
All employer NICs paid as a result of deemed employment income under IR35 will be excluded liabilities for the purposes of the employment allowance. Furthermore, the fee-payer will not be required to make deductions for student loans purposes.
Existing provisions dealing with double taxation will continue to apply following the April 2020 reforms.
The worker’s intermediary will no longer be permitted to deduct the standard 5% allowance in relation to engagements with medium-sized and large clients.
Existing anti-avoidance provisions will continue to apply. For example, where the agency or third party that would be the fee-payer is offshore, the liability moves to the next UK person above them in the contractual chain. If only the client is in the UK, they will be liable.
The government will also consider introducing other anti-avoidance measures to prevent abuse of the provisions which will exclude small private-sector clients from the reforms.
Special provisions deal with contracted-out services and other tax legislation. HMRC are considering legislative options to allow fee-payers to make contributions, not only tax-free but also NICs-free, to off-payroll workers’ personal pensions.
Your views on the proposals
HMRC’s latest consultation invites responses by 28 May. If you have views which you’d like to share, please email the ICAS tax team.
You may wish to hear a presentation by Justine Riccomini, ICAS Head of Taxation (Scottish Taxes, Employment and ICAS Tax Community) on IR35 private-sector practical and policy aspects.
She will speak on this topic at the University of Central Lancashire (UCLAN) at a joint ICAS, ICAEW and UCLAN Tax Club event in Preston on 21 March, and again at an all-day CIOT employment tax conference on 30 April in Tower Hill, London.
Justine is also hosting a round table event on 25 April at 2:00 p.m at CA House in Edinburgh with the HMRC policy team, to inform the ICAS response to the consultation. Any ICAS members or ICAS Committee members interested in attending should contact the ICAS tax team.
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