Rebecca Seeley Harris explores the changes announced in the Budget to the rules for off-payroll working (IR35) in the private sector.
The much-anticipated announcement has been made that, as expected, IR35 in the private sector is to be brought in line with the rules that currently apply for public sector contracts. HMRC has finally achieved what it set out to do back in 2000 at the inception of IR35 but, some 20 years later in April 2020 when the measures will be introduced. Now the engaging businesses will become responsible for assessing an individual’s employment status but, only where the engager is a medium or large business.
Firstly, it will be important to understand who will get an exemption as a small business. The revised IR35 rules will not apply where the engaging business is ‘small’ but, it is not yet known how the government will define ‘small’.
The standard EU definition of a medium-sized business has fewer than 250 employees, a turnover not exceeding €50m or a balance sheet total not exceeding €43m. The UK Companies Act 2006 has a similar definition, but what is likely is that those businesses with fewer than 50 employees will be exempt from the new rules, although the existing IR35 rules for the private sector will still apply.
CEST to be improved
In order to determine the status of the individual, HMRC has stated that it will continue to use the CEST (Check Employment Status for Tax) tool, but to work with stakeholders to improve it and to give further guidance before the reform comes into effect.
One of the main problems with the CEST tool, however, is the lack of information or understanding that the person using it has. The person inputting the information on the client site does not usually have specific information from the contractor and so can produce an incorrect output of deemed employment.
The CEST tool itself has also come in for much criticism and it is doubtful that a digital tool can be foolproof when it is attempting to codify case law. In a recent unreported case at the Employment Tribunal, the judge is said to have criticised the CEST tool and disputed its findings.
In response to the consultation on IR35 reforms, HMRC has confirmed that the changes will not be retrospective and that it will be focusing their efforts on ensuring compliance rather than focusing on historic cases. It is good to know that HMRC will not be carrying out targeted campaigns into previous tax years, so deciding that existing contractors are within the rules will not automatically trigger an enquiry.
As always, there are likely to be repercussions or unexpected consequences. More cases of unlawful deductions of wages may be taken to the employment tribunal: a win-win for the contractor because it is free to take a case to the ET and if they lose because they are neither an employee nor a worker, they get the ideal evidence to pursue HMRC for a tax refund as self-employed. There is also likely to be a new industry of fee-paying companies providing deemed payment services where these can’t be done in-house or on payroll.
Whatever evolves between now and April 2020, the compliance burden will be increased but hopefully the government will have found the solution to the employment status question, the subject of a previously unanswered consultation, otherwise businesses will be solely reliant on CEST.
A further consultation should be expected on the detailed operation of the reform. This consultation will inform the draft Finance Bill 2019-2020 legislation, which is expected to be published in Summer 2019.
Visit our at a glance guide for a summary of all the major measures from Budget 2018.
About Rebecca Seeley Harris
Rebecca is a specialist in ‘employment status’ and the law involving independent contractors and the self-employed for the purposes of tax and employment law. Rebecca has run her own consultancy for the past 18 years but, recently was seconded to the Office of Tax Simplification (an independent body of HM Treasury) as a Senior Policy Adviser to advise the government on employment and tax status.
Rebecca was part of a small team of experts who drafted the Employment Status Review 2015, she then continued to advise on the review of Small Company Taxation leading on the taxation of nano companies and the self-employed. As a result of that review, Rebecca developed the concept of SEPA, providing a vehicle to the self-employed to be able to protect the family home. Rebecca was also a representative on the Cross Government Working Group on Employment Status and has most recently published the review into the taxation of the Gig Economy.