On 5th March, HMRC issued its consultation into off-payroll / IR35 reforms in the private sector, due to take effect from April 2020.
As expected, the changes in the private sector will largely mirror those introduced in the public sector in 2017, although interestingly, HMRC have said that any new areas of legislation made in the private sector will also be applied to the public sector, so that the rules are the same across the board.
The consultation will run until 28th May 2019 and we won’t have all the answers until the draft Finance Bill is published in the summer, however here are the main points under consultation:
Private sector rules based on public sector
Notwithstanding any changes made as result of this consultation, from April the IR35 rules in the private sector will align with the public sector.
Fundamentally that means that it will no longer be down to the individual PSC director to determine their IR35 status. The IR35 decision will rest with the end user, and if a contract is deemed to be inside IR35, it will be the responsibility of the fee payer, the party paying the PSC, to deduct the appropriate PAYE tax and NIC.
Having said this, the private sector consultation proposes a transfer of liability which could have significant impact all the way up the supply chain:
Potential end user liability
As we said, the usual situation will be that the fee payer – the party paying the PSC, eg. a recruitment agency, will be liable to deduct tax and NI if a contract is determined as caught by IR35.
However the key proposal for end users is what will happen in situations where the tax and NIC are not paid.
Firstly, whoever did not fulfil their obligations under the rules – whether that be making an IR35 decision, passing on that decision or paying the tax and NIC, will be liable.
More importantly, even if the end user does everything it should under the rules, liability could potentially be passed up the supply chain until it rests with the last UK-based entity.
This means that the end user could potentially be liable for unpaid tax and NIC even if they have exercised reasonable care in making the determination.
Incidentally the consultation seems to point towards a relaxation of reasonable care in general, saying that:
“Applying a decision to a group of off-payroll workers with the same role, terms and contractual conditions can be appropriate in some circumstances”.
Small company exemption
There will still be an exemption for small companies and, while this shows HMRC’s intent to engage with business, there are questions around how many would be exempt in practice.
Corporations or public sector bodies will not meet the Companies Act definition of a small company – turnover not more that £10.2M, balance sheet not more than £5.1M and not more than 50 employees. There will also be “special rules” for working out whether non-corporate entities are small, along with anti-avoidance measures to stop end users routing PSCs via small associated companies in order to avoid tax.
Improvements to communicating IR35 decisions
The consultation proposes improvements in communicating the IR35 decision, and considers how to ensure it is conveyed to the worker, which does not always happen currently in the public sector, and there is nothing to say it has to.
Therefore, HMRC may introduce an obligation on intermediaries to communicate IR35 decisions down the contractual chain, and the worker may be entitled to ask the end user directly for the assessment and reasons. Which brings us neatly to the next couple of points…
Enhancing the CEST tool
HMRC has pledged to continue working with stakeholders, including tax experts and businesses to improve the much-maligned Check Employment Status Test service.
Indeed the FCSA has confirmed they already have a meeting scheduled with HMRC on this issue.
Appeals process to be confirmed
In the public sector there is currently no right of redress if a PSC contractor considers that their IR35 status has been wrongly determined.
While the consultation suggests that the worker will be able to have the evidence “considered” by the end user, there are still no solid proposals on an appeal mechanism if they still think the decision is wrong.
How Liquid Friday can help
With extensive experience supporting recruitment agencies in the public sector manage the reforms, Liquid Friday are uniquely placed to help with every aspect of your action plan ahead of April 2020.
We will be working closely with our industry partners over the next year and will be there to support agencies and contractors whatever outcome of the consultation and the final details of the legislation.
We can help with:
- IR35 awareness and training
- Independent IR35 testing
- Feepayer Services
- Supply chain compliance