Shifting the burden of IR35

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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.

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.

About Rebecca Cave

Consulting tax editor for Accountingweb.co.uk. I also co-author several annual tax books for Bloomsbury Professional and write newsletters for other publishers.

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By NeilW
29th Jun 2016 12:53

The big question is, why are public sector bodies not simply hiring people as employees as they should do? If the edict had gone out that no individual can be hired on a contract for services then we wouldn't need all this legislation.

If the 'tool' gives the public sector employer an answer of 'employee' then they should be required to offer a contract of employment and the 'employee' should be able to demand one.

Why is it that the simplest solution is always rejected?

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to NeilW
29th Jun 2016 13:05

IR35 never worked and never will (in any shape or form) because it "demands" employee status.
There is no law about employment status which certainly leaves me to believe that it is up to the work giver and doer to decide, not HMRC.

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to NeilW
29th Jun 2016 13:11

The same question could have been asked in 1987 when John Birt was acting as first Deputy and then Director General of the BBC in a freelance capacity!

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to NeilW
29th Jun 2016 13:47

There is such an edict, as set out in the con doc referred to above:
Procurement Policy Note 08/15 requires that for any individuals engaged for more than six months and paid more than £220 a day departments and their arms-length bodies must include a contractual provision that allows the department to seek assurance that the worker is paying the correct amount of tax and National Insurance and to terminate the contract if assurance is not provided.

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to NeilW
29th Jun 2016 14:19

Aptly put NeilW.

Also if the answer is 'employee' then, from an equal opportunities perspective, immediately this is determined the role should be generally advertised and interviews arranged and attended by other interested candidates. Which is time consuming and costly.

Obsversely, if the public sector body initially wants a service company and finds one, but with slight IR35 caught tendencies, then the public sector body may ensure the relationship parameters make the IR35 tendencies go away. As long as the actuality of the relationship is true, then this would be a win-win situation for the public sector body and the service company. However, with the onus for deciding the IR35 status being on the public sector body, the public sector body needs to ensure that the relationship is true and that the public sector body's decision can be clearly seen to be upheld under public scrutiny. If public scrutiny does not uphold the public body's decision is there a case for the service company to claim defamation of character or malicious falsehood?
Defamation of character is the legal term for harming someone's reputation by making false statements. To prove defamation, a plaintiff must show: The statement reflected negatively on the plaintiff's reputation. To have a valid claim for Malicious Falsehood, you would need to demonstrate that the statements made about you were untrue and that they caused you to suffer a financial loss. You would also need to show that the person who made the statement knew that it was untrue and made it with malice. In other words, they know that it may cause you some harm.

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29th Jun 2016 14:02

I have a friend working for a public body as a manager and the need for contract staff is a constant one given the minimum requirements for number of persons to be on call at all times offset against the number of pubic body staff 'on leave'.
The obvious retort could be 'well why not coordinate the leave so that there is always a quorum available?'....for anyone with experience of public body staff that sounds easier said than done. the mentality in some parts is that they apply for a holiday and if it is not approved then they simply take the time of sick.
It is surprising the number of sick leaves that end exactly six months to the day from when they started - six months being the point at which sick leave on full pay is reduced

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30th Jun 2016 10:36

Rebecaa asks: "Is it possible to codify the IR35 tests into an online tool?"

The answer is yes, because at ContractorCalculator we built one 7 years ago which as of this morning has been used 95,939 times by contractors. But it won't give a binary inside/outside result in all cases because it's mathematically impossible to actually achieve that.

IR35 case law is subjective. Subjectivity in, means subjectivity out. i.e. a result on a spectrum ranging from definitely caught, through the grey area of maybe in/out, reaching definitely not caught. There are a few gotchas and silver bullets but if you don't hit those then the answer lies on a spectrum. Hardly certainty the tax system requires. HMRC are falling into the folly of trying to define the day as light or dark, missing out dawn and dusk.

Is it easy to build a test? No it isn't. 2 maths degrees + 30 years programming experience + 17 years reading about IR35 + IR35 tax experts = 6 months to build and a further 6 months to refine and make it work.

They don't stand a chance coming out with anything meaningful for April 2017.

Prediction: A tool that doesn't align with case law, gets shot down in flames, and red tape to hiring the best people we need to help us through the next tough few years.

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01st Jul 2016 11:45

There has also been a tendency in the PS to make people redundant; pay them redundancy and then re-hire as consultants or through PSCs. The answer is and always has been to remove the differences in tax treatment and equalise all taxes and NIC.

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01st Jul 2016 11:45

There has also been a tendency in the PS to make people redundant; pay them redundancy and then re-hire as consultants or through PSCs. The answer is and always has been to remove the differences in tax treatment and equalise all taxes and NIC.

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to Romanista
01st Jul 2016 12:44

@Romanista
I have worked predominantly in the private sector. I have rarely come across redundancy and immediate re-hire as a consultant. I am surprised that it happens in public services.
Not sure I understand what you mean about equalising all the tax treatments. Companies and individuals have, for many decades (even centuries), had separate tax treatment. I would like the company and individual tax treatment to remain separate and different. The employee NI treatment is best left to a separate topic.

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01st Jul 2016 11:45

There has also been a tendency in the PS to make people redundant; pay them redundancy and then re-hire as consultants or through PSCs. The answer is and always has been to remove the differences in tax treatment and equalise all taxes and NIC.

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03rd Jul 2016 23:25

This is at the crux of IR35. In the employer/self employed role it is the "employer" who decides and is responsible if the decision is wrong - therefore risk averse employers will employ rather than risk having to gross up on investigation. If IR35 placed the same onus we would not be in this mess however when our captains of industry can pass this burden down the line they will extract the Michael.

Frankly the comments about difficulties in the public sector are irrelevant as it is the relationship and nature of the contract that is important. I cannot see how someone providing holiday cover for an employee can be other than an employee. If staff are taking sick because they are refused leave (remember the employer in law determines when leave is taken) then that shows typical public service attitude to staffing. Getting contractors in is not the answer for poor staff management.

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04th Jul 2016 17:13

It will be interesing to see how HMRC expects the IT in thousands of agencies (who supply the bulk of PSC contractors to the public sector) and public sector bodies to cope by April 2017 when there is still no firm plan of how it might all work, let alone a specification that can be coded, tested and rolled out.

And then there's HMRC's IT. How will the RTI system cope with PAYE and NIC coming in on 95% of an invoice value for a non-employee who is already on (and will stay on) his own company's payroll at the same time?
There are enough problems with duplicate employment records created inadvertently already, so what will happen when they begin to be created deliberately is worrying. The condoc talks vaguely about ensuring nobody is taxed twice on the same income, but offers no explanation of how that might be achieved. It might be simple if money in = money out, but that's not what's proposed. And what about secondary NIC? The double deduction relief has to operate at the time of payment by PSC to worker (bearing in mind that the PAYE deducted by the agency is from money paid to the PSC, not the worker).

The basic concept of making the public sector client responsible for deciding whether a worker is in disguised employment is superficially attractive, but making it work in practice will not be easy. The condoc also explains what's going to happen in chains of intermediaries, but doesn't explain how information is supposed to flow so that the client knows that the worker is supplied by a PSC, and knows where to supply the information about disguised employment, when it might have no idea who is actually paying the PSC's invoices. And if there's any element of the chain outside the UK, HMRC can enforce nothing.

As Rebecca says, the idea was dropped in 1999, and with very good reason. The clients want PSCs so that they don't have all the hassle and cost of being employers to these contract workers (and so that they can continue to deliver the public service while meeting arbitrarily imposed headcount limits). The new dividend tax will make PSCs less attractive to workers, as will the new restrictions on T&S reimbursements.

Surely the best solution for all parties would be for relevant dividends from close companies to be deemed to be employment income - give CT and dividend tax relief for them and charge PAYE and NIC instead? This wouldn't be fair on those shareholders who do not work in the business unless you limit it to relevant dividends (to be defined), but the PSC would know when it was paying a dividend and how much, so the RTI angle would be easy, and there would be no money-wasting systems upheaval for the whole public sector, and no cause for a decade of tribunal cases as the IR35 argument changes its shape and starts all over again.

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17th Nov 2016 15:26

Well the Government are still willing to give it a go, the legalisation commenced in 1999 and is still work in progress, they will give up soon ..ish possibly around 2050.

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