Research and new consultation on IR35 - should hirers be liable for the tax?
Are new rules adding a burden to businesses and decreasing the flexibility of the labour market?
The intermediaries’ legislation, usually referred to as IR35, has been a source of contention from the beginning. Many businesses see Personal Service Companies (PSCs) as a flexible source of skilled labour. It is used mainly for project, or seasonal work, or to cover staff illness or absences. Government has tended to focus on the potentially higher tax yield where workers are taxed as direct employees.
In a recent HMRC commissioned survey, Ipsos MORI conducted research on hirers' attitudes on potential changes to the rules.
The conclusion was that businesses "saw the changes as being potentially costly, burdensome and constraining".
Researchers focused on awareness, understanding, employer behaviour, compliance and responsibility. Though the sample size was small (with just 41 participants), organisations surveyed were diverse - ranging from public sector and large business to recruitment agencies and SMEs.
It is clear that some small businesses are still unware of the IR35 rules. Larger businesses and Government departments are more aware. However, while many organisations have processes in place to evaluate employment status, these are not always followed – even in the public sector.
Overall, there is a preference for dealing with limited companies (PSCs) and with agencies, rather than with self-employed individuals. Companies are perceived as ‘less risky’ from a compliance viewpoint.
The research finds that hirers are risk adverse. They take the ‘cautious route’ of treating temporary workers as employees, rather than face the risk of penalties for ‘getting it wrong’.
With ambiguous rules and a potential shift towards greater responsibility for hirers, the trend could be exacerbated.
In May 2016, a consultation was launched - Off-payroll working in the public sector: reform of the intermediaries legislation.
This includes the suggestion that public sector bodies, or agencies who supply workers to the public sector, should take on the responsibility of deciding on IR35 status and for applying PAYE.
This is a big change from the existing arrangement where PSCs themselves decide if the rules apply.
While the consultation is directed at the public sector, it is highly likely that the rules will be extended to all IR35 cases in due course.
The Consultation Document suggests reducing decision-making criteria, and creating a new online status indicator tool for public sector IR35 cases. The questions could focus around control and substitution.
Given that the new rules could require agencies to make the decision, questions of privacy and availability of information need to be considered.
On-going monitoring of contracts and performance may be necessary to ensure paperwork reflects what happens in practice. This could prove a significant administrative burden.
The vexed question of who pays the employer’s National Insurance is covered in the examples. These show the hirer, or agency, as liable.
What do you think?
Back in July 2015, an HMRC discussion document raised the question of engagers taking on responsibility for application of the IR35 rules. This brings us a step closer.
If you are impacted by IR35, do put your views forward. Your experience is important; if you have any comments on the consultation or IR35, please contact us at email@example.com .