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HMRC doubles down on IR35

23rd Feb 2017
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IR35, following its introduction in the year 2000, was regarded in the temporary labour industry to be ineffective and rarely enforced.

With new legislation due to be introduced in April, HMRC seems to be taking a ‘double or quits’ approach to bolster its effectiveness.

This time, the potential impact within the public sector can hardly be ignored. Daniel Moss, Practice Excellence Awards technology champion of 2016, reports.

Making the entity paying the limited company responsible for IR35

For several years now, reform of IR35 has been expected and, as with many recent pieces of legislation (for example, offshore and onshore intermediaries and managed service companies), it will follow the principle of ‘debt transfer’ and move unpaid tax liabilities up the supply chain.

This makes prosecution and tax collection much easier (a principle John Healy, the responsible minister at the time the MSC legislation was introduced in 2007 said would only ever be used in extreme circumstances).

The new rules will make the ‘fee payer’, usually a recruitment agency, effectively responsible for operating IR35 and, if the decision is wrong, it is they (not the limited company) who will foot the bill. The fee payer is the entity which pays the limited company.

The practical solution from 6 April

The decision as to whether a limited company is operating inside or outside IR35 will now be made by the public sector entity.

If the worker paid by the limited company is operating as a ‘disguised employee’ then PAYE and NICs should be applied to any drawings the worker takes from the limited company. This can effectively be done by the fee payer in two ways:

  1. Via a ‘deemed payment’ calculation in the worker’s self assessment tax return
  2. By running a payroll calculation on behalf of the limited company for any drawings the worker makes, thereby applying PAYE and NICs deductions in real-time. The worker must be added to the fee payer’s RTI return in order to submit details of these deductions to HMRC

IR35 decision will be made by the public sector body

The new rules, which only apply in the public sector, can be summarised as follows:

Graph 1

Section 61S of the new chapter 10 of ITEPA 2003 makes it clear that the public sector client will be responsible for confirming IR35 status. The public sector body has 31 days to make a definitive decision, if no clear answer is given the public sector body will become the fee payer and the recruitment agency has no liability.

It is likely that public sector bodies will need assisting in the decision and agencies should be preparing to take up that role. There is no mention in the legislation or guidance notes as to who specifically in the public sector will be authorised to make the IR35 judgement, only that they must have “a clear process in place” for complying with their responsibility.

HMRC’s new digital status checker tool

A new online employment status tool replaces the employment status indicator as the practical device for assessing IR35 status. Its line of questioning is enhanced, for example “is a right of substitution a practical right?” replaces the question “is there a right of substitution?” Assessment of the beta version uncovers the new tool to be less conservative than perhaps expected (for example even if the right of substitution is not a practical right – the status will not be driven by this point alone).

There is a real risk of public sector organisations defaulting to an inside IR35 position, with so many grey areas it is the decision of least risk for them after all. It may, therefore, be necessary for a fee payer to gather sufficient evidence to support their own IR35 decision and share this with the public sector organisation to assist them in their decision process.

HMRC’s technical guidance has worked examples of inside and outside IR35 scenarios. Predictably, eight out of 10 of the examples result in inside decisions, and the two outside decisions are extreme examples. Most IR35 decisions will of course be in the grey area and open to different interpretations. Given the potential liability of a wrong decision, this is not a great place for fee payers to be.

HMRC’s attempt to simplify the complex legislation into a logical decision tree is a noble undertaking, one that has been well-received; however public sector bodies and agencies should not expect this to be the final answer that they have been waiting for.

Final legislation due in March following the Spring Budget

While the substance of the legislation is not expected to change, there may be amendments. For example, the notice period of 31 days for public sector bodies may be shortened. As usual we will have to wait for any details like this to be confirmed.

So the chips are down and it doesn’t look like HMRC is bluffing this time. It will be imperative for all parties in the chain to stay informed of all new developments as they arise.

Replies (19)

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By essex accountant
23rd Feb 2017 13:05

I have a contractor client who provides his services to a university. He has given one month's notice of termination of the contract last week. He said that about 30 more contractors at the same university had done the same.

Thanks (3)
By ireallyshouldknowthisbut
23rd Feb 2017 13:38

I have several clients who are currently being 'assessed' in the public sector, and are likely to vote with their feet.

My understanding from being copied in on various emails is that the stance will be:

1. Key workers will magically be outside IR35 so they dont walk off the project
2. Non-key workers will be in, so can chose is to stick or go.

The money saved from non-key workers quitting will be used to bolster the rates on the remaining workers.

The odd thing about all of this is that it ought to be a zero sum game, ie any extra tax suffered = extra funding which could in theory be passed back to the departments.

On a wider point, it would save a vast amount of public money if the public sector just employed these people in the first place rather than paying a chain of middle men (usually capita first, then a 'proper' recruitment agency in the middle, then us, before the contractor gets paid). There is nothing to stop government employing people on 12 months contracts.

Thanks (12)
Replying to ireallyshouldknowthisbut:
By simmotech
27th Feb 2017 11:56

>>On a wider point, it would save a vast amount of public money if the public sector just employed these people in the first place
You are missing the point that 'real' contractors specifically don't want to be employed by anyone other than their own limited company. They just want to go in and do what they agreed to do and be paid the fees they agreed. End of.
Ironically, the public sector wants this separation too but they, and the agencies they insist on using, use contracts and terms which use employer-speak. So they end up paying more, annoying 'real' contractors and eventually losing them.

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By lesley.barnes
24th Feb 2017 09:51

Just this week two clients who were PAYE in the public sector on 12 month contracts have been in touch. They are being transferred to agencies in April were IR35 will be applied. The bit they are finding hard to swallow is that they will pay the employers NI and agency fees so will be worse off for doing the same job.

Thanks (1)
Replying to lesley.barnes:
By mikewhit
27th Feb 2017 10:57

Yes, that was always the beef about being "inside" IR35 - both employer's and -ee's NI is payable.

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By mabzden
24th Feb 2017 13:08

Is there a link to the final or beta version of the new status tool?

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By hiu612
27th Feb 2017 10:38

Same - we've seen a taxpayer engaged via one of the largest employment agencies who has been sent a letter saying the tool isn't available, their default stance is to assume he is employed, and he can i. become employed, ii. stay invoicing, but both suffer PAYE and lose 12% his agreed day rate, to cover NI, or iii. join an umbrella company. Hard to imagine he'll be continuing to work in that contract too much longer.

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Replying to hiu612:
By jacwild
27th Feb 2017 10:53

I have been in touch with colleagues in the department of a public sector client where I finished in June last year. They were given what the client thought was an ultimatum.

Either apply for a permanent job, leave or be classed as PAYE.

90% left.

So now the shortfall is being filled by one of the larger suppliers, and as I knew the rate card for those roles when I was there I can confirm they supplier charges double the rate the individual contractors were getting.

Thanks (1)
Replying to hiu612:
By norstar
27th Feb 2017 12:57

Ditto. "default stance" is the correct term as they aren't willing to invest the time and effort, not to mention risk of going through the assessment.

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Replying to norstar:
By accountsdirect
28th Feb 2017 15:31

One of our client received this email from his agency:

Good Afternoon…

So once again, apologies for not being so available in the last few weeks .. I am spending a lot of time still with clients regarding IR35

In Summary , all clients are treating this as it is going ahead, and that all our workers are deemed inside IR35 regulations so I am responding accordingly.

For those of you who have let me know your plans with regard to IR35 changes , thank you very much. Please be aware we are constantly chased by vendors for this information.

To update you, a number of you have asked about alternative Umbrella Companies that are not on our PSL of approved agencies, I have been contacting them and asking for their compliance packs and confirmation they fit within HMRC framework ( ie pay PAYE and not offshore ) and then getting it signed off by our HR.

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By cfield
27th Feb 2017 11:44

Some of my clients in the NHS have been getting emails suggesting that the decision will be made based on answers they give to questions in the online tool. I doubt the agencies will enquire too much into these answers. For example, if the contractor claims to be in control of the work, they're unlikely to be asked "Why do you think that?".

I guess the contractor will then be in the line of fire under the debt transfer rules for giving "wrong" information, so the same situation as now, except that they will stick out like sore thumbs and be easy prey for an IR35 enquiry.

Another solution adopted by one of my TfL contractors is to quit and work through a private company that provides services to London Underground and Network Rail. So long as they don't act as a recruitment company, they will be outside the scope of the new rules.

Looks like many others will simply quit the public sector altogether. It remains to be seen what sort of an effect this is going to have on public services.

Thanks (1)
Replying to cfield:
By accountsdirect
28th Feb 2017 15:24

It looks like Tfl has retracted from it's initial tough stance (Not accepting PSCs at all). Several of my clients who work with Tfl have been sent emails that they would no longer be allowed to work through limited companies.

So, the PSCs will be liable to pay NI and PAYE (inside IR35) but what happens to their employment rights (essentially HMRC or PSBs believe they are disguised employees). I think it will soon be challenged in the court.

Utter madness!!

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By norstar
27th Feb 2017 12:58

In my experience so far, every agency and public sector body has just automatically welched out of using the tool and are blanket assessing everyone as IR35 - even before the tool is released.

I've seen several clients go over to an Umbrella company already or where possible, go into the private sector. Can't see the benefit of this to the government at all.

And why oh why is everything last minute like this? People make contract decisions more than 4 weeks in advance. It's totally unacceptable this is hanging in the air at this late stage.

Thanks (1)
By DotasScandalDotOrg
27th Feb 2017 16:38

Interesting article on this very topic, and a lot of sensible commentary from actual contractors in the comments section.

Thanks (1)
By myke
27th Feb 2017 16:54

I need guidance pls. PSC with a client (director) that falls within the IR35; the agency/umbrella companies deduct PAYE, Er's & Ee's NICs at source and pays the net to the PSC. The PSC accounts this as income??; am I right to assume that the client will then receive credits against the tax (PAYE, Er's?? Ee's?? NICs??) that has already been deducted and can draw the net funds out of their PSC as they see fit? How'll these affect the corporation tax of the PSC & the client's PAYE self-assessment etc. without the effect double taxation??? Pls help!!!

Thanks (0)
Replying to myke:
By Dave Investigator
01st Mar 2017 18:08
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By Mikolaj
27th Feb 2017 18:34

What stinks is that the Public Sector employer should be forced to employ all short term staff themselves directly. All agencies refuse to pay employer NI @13.8% or holiday pay as added cost, so they force the contractors through umbrella companies whereby income tax and employee's as well as employer's NI is payable, and the contractor has to pay an Umbrella fee to be ripped off. This is a 'RACKET'!
I have many locum consultants doctors as well as other grades of medics who are also answering with their feet.
The NHS will suffer to a significant extent as HMRC is effectively urinating on their shoes here, potentially forcing hospitals to pay even more for locums? Or will hospitals just do without and do less operations, shut departments even. The NHS simply cannot survive without locums. The pending NHS chaos will cost significantly more than the uplift in tax take that will not happen as more medics just retire or just work less, and worse still leave for sunnier climbs.
We will now have a two tier system for tax, the public sector and the private sector, leaving significant remit for legal challenges I believe.
The only saving grace is that pension contributions can be re-routed via the Umbrella company to obtain tax relief for the ltd and the minimum percentage contribution as per current regs. and total tax relief for the remainder employee contributions, noting the combined limit of up to £40k pa.

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By Myaccountancyteam
08th Mar 2017 12:26

As per the latest update from my client, who is currently working on a contract with NHS trust.

NHS trust plan to;

1. Deduct Employee NI and Income tax will be from contractor pay
2. NHS Trust will also pay the employer NI
3. Contactor hourly rate will be adjusted to compensate for the employer NI
4. P60 / P45 will be produced as the case for PAYE employee.
5. Issue new contracts

Effectively contractor will become an employee without all the employment benefits (pension/ holiday etc.) also contractor must fund the employer NI vie the reduction in the daily rate.
I can understand from systems perspective, based on current functionalities of all the payroll system NHS must setup the contractor as employee to handle the RTI reporting.

What would be the implication of such treatment?
• How this will be treated for corporation tax by the PSC,
• Legal aspect of the employment- will contractor have the same legal rights as employees in employment tribunal
• Impact on the self-assessment

These are some of the concern that I think that we need more clarity.

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