Off-payroll legislation a barrier to business growth

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Chris James
Head of Accounting Operations
JSA Services Ltd
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While the current IR35 rules don’t work perfectly, the government’s proposed changes are cause for concern and may have unintended consequences for UK businesses, writes JSA Group’s Chris James.

Last week, as expected, the government issued provisions to translate the off-payroll rules operating in the public sector to the private sector from April 2020 as part of Finance Bill 2020.

I currently have strong concerns about parts of the changes. Like most people, I don’t claim that the current IR35 rules work perfectly. However, these changes, especially when rolled out concurrently alongside Brexit and the disruption that will inevitably bring, are a recipe for material business impact at a time when UK Plc is trying hard to attract and retain business here.

We’ll prepare for the changes to come in, but meanwhile we will try to lobby government around the appalling timing of these needlessly rushed changes.

While attending the ‘Stop the Payroll Tax’ event at Parliament last week, it was reassuring to see how quickly those MPs who attended understood the impact of the unintended consequences of this legislation.

We’ll continue to make these points to them and to the UK business community, between now and the next Budget, whenever that falls.

Small business exemption

The small business exemption included in the new rules is particularly difficult. Small end users can engage contractors as they do now, and those contractors will have to apply ‘old’ IR35 as they do today. The Companies Act rules have been used, but with tweaks to try to stop abuse (for example, a large end-user cannot just set up a ‘small’ subsidiary and engage through that).

However, ministers have decided that rather than have small businesses be required to confirm their small status, the supply chain should assume that if an end-user does not supply a determination, then that means they are exempt due to size, and the chain proceeds on that basis.

Why, we asked at an HMRC briefing in Whitehall on Thursday, does the law not simply require a small end-user to confirm their size exemption, giving certainty to the chain (ie determination received = use new rules, size exemption received = use old rules)?

The answer, that ministers wanted to prevent an onerous burden for small businesses, I simply don’t agree with.

Small businesses know they are small (their accounts have to say so) and the absence of certainty means that PSCs (who are the smallest of small businesses) have to operate in no man's land while they wait to see if a delayed determination will arrive, or if a communication breakdown elsewhere in the chain has misled them.

By which time, a costly status assessment may have been made, or a rate agreed without clarity on how it will be taxed, or whose job it is to tax it. This is highly unsatisfactory in the real world.

Preparation for supply chains

In the meantime, supply chains need to prepare. In simple terms, the contractor workforce needs to be identified and then the likely IR35 status of the different parts of it assessed. Decisions need to be made about which parts need to work in a different way, and if so, what budget will be available to pay for it.

This will drive the action plan. If working practices or contracts need to change, this should be done in the second half of 2019, after the lawyers have had a careful look at this new law.

It is sensible to consider all options to cope with this disruption and to ensure expertise exists across organisations to ensure non-compliant models such as loan schemes do not get used instead of full tax payroll solutions, where these are necessary.

New processes will be needed for business as usual after the changes come in. Each new assignment, extension or variation will need to be reassessed: who’s going to do that and who will bear the cost? How will your supply chain evidence the transfer of information in and out of your business? This is needed to minimise the chances of liability ending up at your door.

Communication plans will need to be prepared. End-users (end clients) and recruitment businesses should be talking as soon as possible, and contractors will want to talk as they wake up to the issue, if they haven’t yet.

As ever, agencies and other intermediaries will have the hard job of communicating with contractors before they have the answers the contractors need, as agencies will in part need to wait for a steer from those end-users.

HMRC has promised practical, useful guidance alongside the new rules, along with developments or improvements to the CEST tool. Business will certainly need it if, as suggested in the impact assessment, businesses should feel no significant economic impact. Frankly, it’s very hard to see how…

About Chris James

Chris James

Chris James is an IPSE accredited, award-winning Chartered Accountant. He is Head of Accounting Services at JSA Group, which provides accounting, payroll, umbrella and business advisory services to small businesses, contractors and freelancers across the UK. He is also chairman of the FCSA.

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19th Jul 2019 09:58

The unintended consequences of not having IR35 are that employers with high payroll costs will use it as an opportunity to force employees to give up employment rights by becoming limited companies and being paid only when work is available and the employers will also save on NIC and pension contributions.

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By IANTO
19th Jul 2019 10:19

Which is why there should be an equal penalty for the clients who wrongly classify individuals as caught by the new rules, when they are not and can prove this.

The only proposed penalties are for when a client classifies individuals as not caught by the new rules and HMRC prove otherwise.

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19th Jul 2019 10:55

Brilliant - yet another opportunity to increase the 'proxy tax' take.
You can't beat uncertainty and obfuscation as methodologies to uplift the potential for penalty fines.

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