Shifting the burden of IR35
Rebecca Cave reviews a proposal to change the application of the IR35 rules for contractors engaged by public sector bodies.
Over 17 years ago Chancellor Gordon Brown attempted to plug the hole in the tax system which encourages individuals to work through their own personal service companies. The issue for the government was always the avoidance of employer’s NIC, rather than income tax.
Thus, the first solution set out in the 1999 Budget press release number IR35, was to make the client (final customer of the contractor), shoulder the burden of the new tax regime. If the worker who provided services through an intermediary operated under control of the client, as to the tasks or manner in which he worked, the client would have to apply PAYE and NIC to amounts invoiced by the intermediary. This idea was developed in a paper released to a handful of people in April 1999, which was nevertheless widely circulated. The Revenue received over 1,700 responses.
By September 1999 the proposals had changed significantly, such that the intermediary would be responsible for compliance with what become known as IR35. Also the control test was replaced with an employed or self-employed test.
It appears that HMRC has a short collective memory as proposals contained in a consultation paper in issued on 26 May 2016 take a similar position to that outlined in the original IR35 press release. The current consultation paper suggests the client, or third party agency if there is one, will have to test whether the worker falls within IR35.
A new online IR35 interactive tool will allow the client or agency to perform this test by answering just a few questions. The result from this online tool will be provided in real-time and give the definitive HMRC view on the position. Apparently the IR35 online testing tool will also be available for private sector contractors to use.
When the contract falls within IR35, the client, or agency in the chain who is closest to the personal service company, must apply PAYE and NIC to the net amount invoiced (less VAT and 5% expenses). This PAYE will be reported through RTI, using the worker’s NI number.
These changes will only apply to contracts performed for public sector bodies from April 2017 onwards. The definition of a public sector body is lifted from the Freedom of Information Act 2000, but’s not straightforward - over 40 pages of the con doc are taken up by a list of bodies which would be affected.
It’s worth noting that the basic IR35 rules are not being reformed; the law will remain exactly as it is today with this one exception for public sector contracts.
Of course, for this proposal to be watertight the online IR35 interactive tool must provide an answer which is in line with 300 pages of relevant tax law and regulations, taking into account all of the employment status cases which have ever been heard.
This is not an easy task. I understand that a draft version of the online tool is nowhere near ready, although HMRC want to start testing it from August 2016, which is the consultation deadline.
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Is it possible to codify the IR35 tests into an online tool? Note that HMRC specifically say the current employment status indictor tool can’t be used to check for IR35 arrangements or to test the employment status of agency workers.
Consulting tax editor for Accountingweb.co.uk. I also edit Bloomsbury's Tax Rates and Tables and write newsletters for other publishers.