Rebecca Seeley Harris analyses the government’s reaction to the consultation responses on the IR35 (off payroll working) rules, which are to be extended to the private sector.
During the summer of 2018, a large number of organisations and individuals responded to the joint consultation on off-payroll working in the private sector and engaged with both HM Treasury and HMRC. The formal responses to the consultation were published on 29 October to coincide with the Budget announcement that the IR35 rules will be changed to be brought in line with those in the public sector.
The new rules will apply from April 2020, but it will only be large and medium-sized business customers that will be required to make an assessment of their contractors for IR35 purposes. Smaller business customers will carry on operating the current IR35 rules, which must only lead to confusion.
Reading through the summary of responses, there are clear indications of what the government’s thinking is on the upcoming amendments to the legislation, and other matters such as fixing the Check Employment Status for Tax (CEST) tool.
This article details the likely amendments to the legislation and what the private sector needs to do to be prepared for the changes in April 2020.
Rollout to the private sector
In responding to the question of extending the public sector rules to the private sector, the government considered that it was the most effective way of tackling the tax gap created by non-compliance. Although concerns were raised about the implementation of IR35 reform in the public sector, based on evidence and engagement with stakeholders, the government considers that overall the reform is working well in the public sector.
The reforms to the IR35 rules for the private sector are to be brought in from April 2020. This is in recognition, the government says, that the private sector needs more lead-in time to set up systems and review existing contracts.
The latter point is a very important one that seems to have been glossed over. The changes to IR35 in the private sector are statutory but, and this is a big but, the assessment as to whether someone is inside or outside IR35 is still an opinion.
If the contractor is under an existing contract, it may well be that the business customer will be in breach of contract because of the repercussions in making that IR35 assessment – ie not paying what was due under the contract. This is especially so where the employer’s national insurance contributions are concerned.
What if the decision is wrong?
The contractor has limited recourse if they think that the IR35 assessment is incorrect. The contractor can’t appeal to their business customer and can only make an application for a refund of tax and NIC to HMRC at some later date after deductions have been taken.
The only recourse open to the contractor would be to make a claim for the amount owed under the contract or take action at employment tribunal for unlawful deduction of wages. Both actions mean that the business would have to defend itself, which costs time and money.
Small businesses exempt
The government has considered the administrative burden on businesses and their capacity to implement change and has decided that for services provided to small businesses, the responsibility for determining IR35 status and paying the appropriate tax and NICs will remain with the PSC, an even smaller business.
The government intends to use similar criteria to define a small business as set out in the Companies Act 2006, which determines a company is small where it satisfies two or more of the following requirements:
- Turnover: not more than £10.2m
- Balance sheet total: not more than £5.1m
- Number of employees: not more than 50
So, only those companies with more than 50 employees, plus one of the two other conditions will need to make the assessment as to IR35 status. But the majority of contractors are engaged by medium and large companies.
The small businesses who are recruitment agencies will, however, be affected. Those that deal with the medium and large companies, which is most of them, will have to deal with the admin and most likely the payment process.
Concern had been raised about medium and large businesses making blanket decisions for the IR35 status of groups of workers in similar roles without recourse, should the decision be incorrect. The government intends to explore further options for the consequences of businesses failing to use reasonable care in making their decisions.
Although, perhaps, the government should also consider giving the contractor recourse against the business for making an incorrect decision. This is especially the case where an assessment of “outside IR35” is made initially and then reversed months later to “inside IR35”, with the consequences of backdated deductions for the contractor.
HMRC has stated that it will publish detailed guidance and provide support and education to help customers understand and implement changes. The guidance will aim to support businesses to make employment status decisions with confidence, which individuals working through PSCs will be able to see and understand. HMRC will also set out what individuals should do if they do not agree with the assessment of their employment status.
Part of this guidance will be to improve the CEST tool to ensure it reflects the needs of the larger and more diverse private sector. The concerns that were recognised explicitly were those over mutuality of obligations (MoO), how to treat multiple contracts and clarifying the language used in places.
The latest IR35 Forum minutes look in more detail at these various concerns and, in particular, at the differences that remain in the interpretation of MoO between HMRC and some stakeholders. HMRC has said it will work with stakeholders to understand the concerns that were raised during the consultation.
Employment status rules
A number of respondents brought up the issue that the government had recently consulted on the employment status rules and suggested that the government should decide on the employment status rules more generally before reforming the off-payroll working rules. The government, however, thinks that it is right to tackle the immediate risk to revenue presented by non-compliance with the off-payroll working rules. It will consider changes to employment status generally in due course but, not as part of this consultation.
A further consultation on the detailed operation of the new rules will be published in the coming months and it will inform the draft Finance Bill 2020 which is expected to be published in Summer 2019.
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.