Government issues new IR35 consultation for the private sector

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The new off-payroll working consultation has arrived and according to RSM’s David Williams-Richardson, it puts an increased burden on private sector employers and recruiters.

The government yesterday published the much-awaited policy and consultation document on proposed reforms to the off-payroll working rules (known as IR35) for medium and large businesses in the private sector due to apply from 6 April 2020.

The document provides welcome clarity on the proposed operation of the rules. It is disappointing, however, that no firm details about aligning the employment status tax and rights frameworks have been issued following the recent publication of the Good Work Plan.

The government has, however, committed to ensuring that an enhanced Check Employment Status for Tax (CEST) service will be available before the reform is implemented and has also announced that an education and support package will be put in place.

As expected, it has been confirmed that the reform will be primarily based on the off-payroll working legislation introduced in the public sector from 6 April 2017 but with important proposed changes to that current legislation, predominantly around clarifying the obligations of the business using the services of the worker and those involved in the supply chain. Importantly any changes around these points will apply equally to both private sector businesses and those in the public sector from April 2020.

The new legislation impacts medium and large end-user businesses in the private sector using the services of off-payroll workers operating via intermediaries such as Personal Service Companies (PSC). It also impacts other parties in the supply chain such as recruitment agencies who onwardly provide workers who operate through intermediaries such as personal service companies.

Medium and large businesses in the private sector now have just 13 months prior to the implementation of these rules and the work required to be prepared for this change should not be underestimated. Sufficient preparation will be crucial.

Why is the government introducing these changes?

The IR35 rules were originally introduced in 2000 with the intention of ensuring that individuals who are working like employees but who operate via an intermediary, such as a personal service company (PSC), pay broadly the same tax and National Insurance Contributions (NIC) as an employee would.

The IR35 rules have, however, been largely ineffective as the PSC has had to ‘self-assess’ whether the rules apply. HMRC estimate that there is widespread non-compliance which they have been unable to effectively tackle which will result in lost tax and NIC revenues of £1.3bn by 2023/24 in the absence of change.

What is the proposed change?

The reform will place the burden for determining whether IR35 applies onto the private sector end user of the worker’s services, where they are a medium and large businesses, from 6 April 2020. Where it is determined by the end user that IR35 applies, the fee payer (which may be the end user themselves or another third party) will become responsible for accounting for and paying the related tax and NIC, including the additional cost of employer’s NIC, to HMRC.

Where the end user of the worker’s services is a small business, it is confirmed that the responsibility for assessing the arrangements and applying IR35, will remain with the PSC. This will be the case even where the worker is provided via a third party such as an agency.

What is a small business?

The Government has confirmed that it intends to use the existing statutory definition from the Companies Act 2006 to define a small business. This is a business that has two or more of the following features:

  • an annual turnover of £10.2m or less;
  • a balance sheet total of £5.1m or less;
  • 50 employees or less.

The consultation document acknowledges that the Companies Act definition does not apply to non-corporate end-user clients (such a partnership) and proposes a separate test for such entities that will either apply to businesses that have both 50 or more employees and turnover exceeding £10.2, or which meet one of these tests.

It is also confirmed that where these tests are met part way through an accounting period the off-payroll working rules will apply from the start of the tax year following the end of that accounting period.

Clarity on responsibilities for each party in the supply chain

The Government has acknowledged that there is a need to provide legislative clarity around requirements to pass on the status determination (and the reasons for reaching that determination where requested) down the labour supply chain. Importantly it proposes to change the legislation so that the end user of the services must provide both the off-payroll worker and the party they contract with (such as an agency) with details of the status determination.

It is also proposed that all parties in the supply chain will be required to pass on details of the determination down the chain although it is acknowledged that there may be the need for a ‘short circuit’ solution in the case of lengthy supply chains!

It is acknowledged that the current rules have no clarity around the processes to be followed in the case of status disagreements and provides suggestions as to how this may work from 6 April 2020 both for the private sector and the public sector. Interestingly the current proposal is for clients to develop and implement their own processes to resolve disagreements but based on a set of requirements to be set out in the legislation.

Where HMRC does not receive the tax that it believes is due it is also proposed that the liability will fall upon the entity in the labour supply chain that has not met its obligations. Importantly it is also confirmed that if HMRC is unable to collect the outstanding liability from that party, that it will transfer back to the first party or agency in the chain, which could be the end user itself. Clearly, this will act as a real incentive for businesses to undertake appropriate due diligence on their labour supply chains going forward.

All these obligations will create a significant ongoing administrative burden as well as an increased exposure to risk of non-compliance for both the end user of the services and those in the supply chain. Businesses will need to ensure that they have robust procedures in place to meet their ongoing obligations and be ready for implementation.

About David Williams-Richardson

David Williams-Richardson

David Williams-Richardson is a partner in RSM’s employer solutions team in Gatwick where he specialises in all aspects of employment tax compliance and advice. He has particular expertise in issues such as IR35/employment status, termination payments and dealing with HMRC disclosures and reviews including advice on employment tax aspects of senior accounting officer (SAO), Know your Customer (KYC) and traditional PAYE audits.

David advises clients across a range of industries with particular focus on the recruitment and aviation and travel sectors.

Replies

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06th Mar 2019 10:58

Bye Bye contractors......

The government has wasted £4bn on HS2 so far and not batted the proverbial eyelid, yet HMRC (estimate?) a loss of £1.3bn in or over 4/5 years.
What extra cost to businesses will there be to implement this legislation? Let me guess, more than £1.3bn

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By jimeth
06th Mar 2019 11:24

Particular clarity is required about how this will operate in the Construction Sector and how it will interact with CIS tax obligations. Following 6 months after the introduction of Construction Reverse Charge VAT this could be a horrendous burden for the Construction Sector.

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to jimeth
11th Mar 2019 16:47

If the off-payroll working rules apply, these rules will take precedence over the rules in the construction industry scheme.

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By cfield
06th Mar 2019 11:28

Is there anything in these new rules to stop end-users unilaterally reducing contractor pay to "pass on" the employer NI they will have to start paying?

All the current rules do is stop the fee payer blatantly re-charging employer NI to the contractor, but if their pay is reduced instead, it has exactly the same effect.

I suppose HMRC will say that this is a contractual matter and nothing to do with them.

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to cfield
06th Mar 2019 13:44

It is the same with employees. The employer has to factor in the NI when looking at the cost of employing someone.

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06th Mar 2019 11:47

Other countries have a status similar to "worker" that seems to be creeping into case law from the gig economy. This is a half way house between personal service companies and self employment. Instead of applying an ever increasing pile of sticking plasters to a failed piece of legislation, why not just recognise that there is a gig economy, define its status and tax/Ni rates and forget about this horrendous change that has already driven contractors out of the public sector. Where contractors have remained, scarcer resources have been able to increase day rates to compensate. In this case, although the tax take has increased, public sector costs have gone up, so no one wins. When the private sector is included, this is inevitably what will happen, because the contractors won't now have the choice of changing from the public to the private sector, so again no one wins. So why bother. Best to create the new 'worker' status and avoid all of the uncertainty and extra administration costs.
.

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to raybackler
06th Mar 2019 13:50

So why does a contractor sell his or her services through his or her own company that has no real or significant purpose other than to avoid NI and increase net pay of the contractor? If the "worker" contracted personally with the client their pay would be subject to PAYE and employer's NIC.

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to raybackler
06th Mar 2019 13:51

.

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By IANTO
to tonyaustin
06th Mar 2019 14:01

Because the clients won't engage us unless we work under that structure. So if we are to be subject to those conditions, then we are legally entitled to enjoy the benefits, in the same way that the client enjoys the benefits of that structure.

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By IANTO
to tonyaustin
06th Mar 2019 14:13

and just to set the record straight, I pay employer's NI and employee's NI (before my wife and I were of pensionable ages), corporation tax, dividend tax and PAYE.

My gross is unlikely to be more than what I would have been earning by now, if I had not been made redundant at age 50 from my permanent position.

So, whichever way you look at it, I pay more taxes than a permanent employee would do on the same gross income. It's just that I was subject to ageism and contracting was my only way of earning a living.

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to tonyaustin
06th Mar 2019 14:23

Paradoxically contractors have no choice but to use limited companies since the government introduced IR35. No agency or large end client I have encountered will deal with contractors unless they are through a PSC or some kind of umbrella arrangement.

Additionally since the 2017 introduction of the dividend tax, contractors can effectively be paying more tax than an employee since the additional marginal dividend tax rate of just over 6% has no cap.

It is of course generally not the contractor’s choice whether a role is contract or permanent - that’s down to the client. Many contract roles are for specific projects where particular skills are required for a number of months or possibly years. Self employed people have traditionally filled these roles but if these proposed changes are rolled out I see it becoming very difficult to continue, as being temporarily payrolled with PAYE/NIC deducted at source (and no employee benefits) doesn’t seem to leave any possibility to claim the often very significant travel costs which are necessary to perform these short term roles.

In my view the proposed rules are poorly thought out and predicated on the wrong assumption that the average contractor is a long term disguised employee commuting a short distance from his/her home with negligible expenses.

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to tonyaustin
06th Mar 2019 14:35

The replies to you above mostly cover the reasons and it is not a simple as tax/NI avoidance. Most employers engaging contractors have a specific need for a project duration. They don't want permanent staff after the project is complete and won't offer self employed work for this very reason, because employment status can then be challenged. By insisting on a personal service company the customer avoids the risk of a self employed person being re-classified as employed at some future date with the associated risk from back taxes and NI. So this is about the risk the customer is avoiding and not down to the contractor trying to save tax/NI themselves.

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06th Mar 2019 12:21

There will be some interesting tax issues here.
Consider a contractor who is carrying Professional Indemnity insurance - typically premiums have to be sustained for 6 years after a gig in case of consequent liability.
But then ends up as 'deemed employed', and therefore falling [one assumes] within the compass of the 'employers' insurances.
It would seem reasonable that the Professional Indemnity premiums are tax-deductable for the duration of the 'employed' gig - or not?
The whole thing is riddled with anomolies that HMRC cannot predict - and, worse, will have no process for handling when they arise.
The recent circumstance where they acceded that HMRC was liable for an IT contractor's holiday pay is notable, if only because HMRC settled on the court steps, clearly unwilling to test the rectitude of their imposition.

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to dgilmour51
06th Mar 2019 14:04

accrue 6 years premiums in the company termination accounts......

how about that?

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06th Mar 2019 12:00

What is going to be interesting here is how business reacts.

Are they going to really get rid of all their contractors and put them on PAYE, and in doing so probably lose quite a lot of talent.

Or are they going to assess their contractors as outside of IR35, as the contractors themselves are doing.

Given its virtually impossible to work out if a contract is inside IR35 or not, that issue is not going away, new CEST tool or not.

What is also interesting is how exactly HMRC will police any of this. I think we will see a branching of "cautious" business just dumping people onto PAYE and "aggressive" business decided that IR35 does not apply and being more competitive in the market for talent.

Interesting times.

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By cfield
06th Mar 2019 12:19

There is another option. Outsource the work to the contractors lock stock and barrel. It would take a lot of courage on both sides, but it already happens. One of my clients is a 3 man firm specialising in risk management and they have no IR35 issues with their public sector clients. I have a lady on her own who runs exhibitions for the motor trade and she manages £500,000 costs herself after billing the client up-front. She won't be affected by the public sector rules.

Of course, you really need to be a boutique firm offering a wide range of skills to get outsourcing contracts. The end-users are unlikely to trust an individual on their own. I can see an industry springing up soon bringing contractors together into "proper" firms able to bid for these contracts. That's the way ahead I think. Either pay tax like an employee or run a proper business. That's the stark choice a lot of contractors will have unless they can get the clients onside and pass the new style CEST.

Mind you, until they take the definition of employment away from the courts and introduce a statutory test, I can't see HMRC having too much luck challenging the non-IR35 cases. It's one thing to pursue an individual who just ignored IR35, but quite another to argue with a large firm who decided, on the facts, that their contractor has control of the work and/or an unfettered right of substitution.

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to cfield
06th Mar 2019 13:58

I have a couple of clients pursuing this model, it seems to work on the very longer term contracts HMRC were seeking to hit.

The new IR35 rules don't apply, so they can engage contractors to work through the entity as appropriate, leaving the risk where it is now.

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06th Mar 2019 12:15

Semi-scapegoating contractors again. The vast majority of the perceived tax loss is due to the hiring firm not paying Employers National Insurance when they hire a contractor.

The actual amount of tax a contractor pays, via corporation and dividend taxes, is similar to the taxes paid by an employee.

The Government, in all of it's pamphlets, is playing this down, and it's worrying, because firms need to be aware of the potential tax bomb they face if they do not assess their entire workforce before April 2020.

I hate to scaremonger, but the consequence of getting is wrong for companies is enormous. Crippling in fact.

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By sawebs
to davechaplin
07th Mar 2019 08:05

Dave, as per my comment further down this thread - surely it would be fairly easy for insurance companies to sell me a policy so I could indemnify my clients against any future tax risk, thus removing all their risk? I know you deal with the Insurance industry through your business - lots of money to be made I'm sure for someone entrepreneurial like yourself?

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By IANTO
06th Mar 2019 12:19

The gross unfairness of the proposed changes is that there will be a penalty if the client judges the contractor to be outside IR35, when in fact they are subject to it, whilst there will be no penalty if the client judges the contract to be inside IR35, when it is not.

The only penalty to clients will be when contractors so judged take the client to the ET, which of course most contractors won't do, as they would wish to continue with their contracts and so will just take the hit.

HMRC are not stupid, this has always been their strategy. Some will be able to increase their rates, but experiences with the public sector show that this hasn't been particularly successful for many contractors.

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06th Mar 2019 12:52

Lets be honest. For years many organisations have utilised the services of "self employed" contractors working on a week by week basis. In many cases the only customer the contractor has is the aforementioned organisation. Because the contractor issues a daily/weekly/monthly invoice, no employer NI arises. Net result the organisations labour costs are reduced by 10% or more and all the protections under PAYE are avoided. The reality of the situation is the contractor is effectively an employee and should be dealt with on this basis. Its a long term scam HMRC are aware of and trying to resolve in their usual clumsy and complicated manner. Simple solution, the contractor has employer NI deducted at source by the customer unless they contractor satisfy HMRC they are an independent provider of goods or services. That done, the contractor is registered as such and provides evidence to their customer thus avoiding the deduction of employer NI at source. I wonder how many of our current MP`s non parliamentary earnings would attract employer NI if the system was simplified[?]

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to david ryan
06th Mar 2019 13:05

This isn't quite right and over simplifies the issue. Contractors day rates are higher than employees, because they lose employment rights. They don't get holiday and sick pay or employment protection. A contractor will pay more corporation tax and dividend tax than a lower paid employee that then partially compensates for the loss of employers NI. Furthermore, the combination of taxes paid by a contractor, operating through a personal service company, is similar to the tax and NI paid by the self employed, with whom they should strictly be compared.

Contractors are engaged mostly by one client at a time because their work is project related and they are brought in to cover the increase in workload during the project. Once the project is complete, they are no longer needed. The fact they usually have one customer at a time, doesn't make them employees, as HMRC have found out many times when trying to enforce IR35 at employment tribunals.

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By IANTO
to raybackler
23rd Apr 2019 17:04

"as HMRC have found out many times when trying to enforce IR35 at employment tribunals."

HMRC have no jurisdiction over the ET or the EAT. They only have jurisdiction over the 1st Tier Tribunal and the Appeal Court.

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By norstar
06th Mar 2019 13:12

Main issue I see is that most contractors I see have a contract in place that indemnifies the end client against tax/NI costs in the event of the worker being assessed as an employee.

At the moment, that's not an issue as the responsibility lays with them.

But from April 2020, my guess is that a lot of contractors will continue as before and the end client will be relaxed about the employment status, knowing that if HMRC do come in and say the PSC is an employee, they can simply pay the bill and seek recompense from their subbies...

And if that happens, what happens if the contractor disagrees with the IR35 assessment having had an independent review already which said they were outside the scope? Presumably they have no right of appeal as they are not the taxpayer dealing with HMRC in an enquiry. The end client on the other hand is, but doesn't want to bother spending time appealing etc because they'll just pass on the cost. That's not fair or just as the PSC may well be outside IR35 but is unable to contest it legally beyond suing the end client.

The loser here is going to be the small fish in the pond and the economy overall.

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By sawebs
to norstar
07th Mar 2019 08:00

[quote=norstar]

But from April 2020, my guess is that a lot of contractors will continue as before and the end client will be relaxed about the employment status, knowing that if HMRC do come in and say the PSC is an employee, they can simply pay the bill and seek recompense from their subbies...

Surely if the Insurance industry got its act together it could offer a product to Contractors through which they could indemnify the Client against future tax liabilities thus allowing the Client to offer IR35 compliant contracts with zero risk? IR35 Insurance is already available to Contractor companies to remove their risk so presumably the policies just need some redrafting?

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By NeilW
06th Mar 2019 13:04

If you have the talent and you have the skills, then you simply increase the rate to cover the costs and maintain your net trouser.

The whole point of being a contractor is to get a higher rate because you have scarce skills.

Clients either pay, or do without the skills and the job doesn't get done. And since that is the whole point of taxation (crowding out private sector activity to allow public sector activity) what is there to complain about?

Government wants less private activity by forcing the price up. That's what it will get.

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to NeilW
06th Mar 2019 14:41

The current market is nothing like that for the majority of IT contractors I fear. You must be thinking back to the glory days of the 1990s! There is so much more competition now from abroad and particularly India. Thousands of jobs have disappeared over the last decade to the internet and these kind of aggressive and poorly thought out measures by HMRC are only likely to make things worse for UK contractors.

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06th Mar 2019 14:04

The companies using contractors could actually agree a watertight self employed contract where the contractors are in business for themselves. This means that are responsible for the success or failure of their business and can make a loss or a profit, they can decide what work they do and when, where or how to do it, they can hire someone else to do the work, they’re responsible for fixing any unsatisfactory work in their own time, their employer agrees a fixed price for their work - it doesn’t depend on how long the job takes to finish, they use their own money to buy business assets, cover running costs, and provide tools and equipment for their work and they can work for more than one client or at least almost all of the above apply. Of course, both parties have to agree to and comply with those terms.

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By IANTO
to tonyaustin
06th Mar 2019 14:40

In the 23 years that I've been contracting, I've never met anyone who has been able to work in this way. In essence the clients have wanted a workforce which they could control like employees but without the incumbent costs. So there's the rub. The clients have created this arena, and now they will be more accountable for it.

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to tonyaustin
06th Mar 2019 14:45

There is no such thing as a watertight self employed contract. These arrangements are often legally challenged and there is much case law on the subject. Customers know this, hence they want the protection of engaging through a limited company. I have argued elsewhere that there should be a new type of tax/NI structure called 'worker' which follows the definition being established by case law in the gig economy. That would avoid disputes over self employed or IR35 status. These people would neither be an employee nor self employed and wouldn't have to have limited companies. Other countries have this status, so why can't we?

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By sawebs
to raybackler
07th Mar 2019 07:52

Arrangements are rarely legally challenged actually and HMRC victories are few and far between.

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06th Mar 2019 14:31

If you are the FD of a company with 2000 contractors all on 100k and the paye is £100m a year and you are now faced with the possibility that these Herberts might be employees and in 5 years time hmrc are going to ask for 5 x 100m plus interest and fines.....

What would you do....

They are all going on the payroll... bye bye all contractor clients...

From our viewpoint

Youll get the co accounts to do to for April 20 around October 20 then they will all be gone... some of the big contractor agencies are going to implode. You are going to lose 10/15% of your clients and there is going to be a lot of redundancies in firms of accountants in February 21 after all the personal tax returns are done and theres no work....

I suggest a freeze on recruitment from April 19 onwards, let the jobs stock pile by calling them in later and later so in Feb 21 you are doing them at the last minute. Then when the work dries up you will be able to eat into your back log and ride out the next hard 18 months.

With a bit of luck you will have picked up 15% more clients by then to put you back on track . So thats about Sept 22 before you need to recruit again...

good luck mes amies

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By norstar
to Tom 7000
07th Mar 2019 16:10

"If you are the FD of a company with 2000 contractors all on 100k and the paye is £100m a year and you are now faced with the possibility that these Herberts might be employees and in 5 years time hmrc are going to ask for 5 x 100m plus interest and fines.....They are all going on the payroll... bye bye all contractor clients..."

That's my point. This isn't the case if your company has those subcontractors on contracts that indemnify you against employment taxes if HMRC assess them on you.

Most "IR35 proof" contracts I've seen contain this very thing, so apart from the risk of not getting the money from the subcontractor, end clients aren't going to be as concerned about it as all that.

They can simply continue to draw up "watertight" contracts to put the risk of employment taxes being assessed, onto the subcontractor and continue as before.

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to norstar
08th Mar 2019 16:29

No doubt contractors will cover this risk by phoenixing every few years - as they have always been inclined to do anyway. Might also help them avoid NIC in the future on whatever abusive tax scheme they are running this week.

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07th Mar 2019 10:48

Extract above
'What is a small business?
The Government has confirmed that it intends to use the existing statutory definition from the Companies Act 2006 to define a small business. '

At last we have a definition of a small business, they been light on detail up to now (CA or their own criteria).

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