Matt Boddington, director of Chartergate Legal Services, reviews the latest draft of the IR35 legislation which will have a significant impact on the way PSCs operate in the public sector from 6 April.
Story so far
Our two previous articles examined the Employment Status Service tool, and the HMRC guidance for off-payroll working in the public sector. Schedule 1 to the Finance Bill 2017 contains the latest draft of the legislation, including a few changes and new provisions.
The end-client (the public body) has a duty to provide a view on the applicability of IR35 to the worker. This view must be communicated before the contract is agreed, or, if later, before the services under the contract start. There is also a positive duty on the end-client to take “reasonable care” in reaching its conclusion about whether or not IR35 applies.
One problem with having to make an early decision before the contract is even signed, is there is little opportunity to consider many of the factors that can be relevant to the IR35 determination. These factors include; whether the contractor is operating in business on their own account, which case law has established (and even HMRC concede) are an important part of the status test.
Failure to meet either of these requirements shifts the tax liability and reporting responsibility, including any employer’s National Insurance, on to the end-client.
Questions on decision
The end-client must also answer written questions raised about the decision it has reached within 31 days of receipt of those questions. Again, failure to comply with this deadline shifts the liability from the agency (or other fee-payer) directly on to the end-user.
I mischievously note that the legislation does not place any limit on the number of questions that an agency can pose to the end-client, nor the extent of them – nor indeed how many times such a written request can be made. Failure by the end-client to respond in writing to such questions within 31 days results in the end-client bearing the PAYE responsibility.
A savvy agency might bombard an end-client with employment status questions (much like HMRC do!) in the hope that a response isn’t forthcoming and the PAYE responsibility is shifted. Conversely (and equally mischievously) the legislation doesn’t actually say the end-client must answer the questions – it merely has to respond. A two-word response would technically suffice.
These changes are welcome, but there is an obvious issue here. While there could be liability passed to the end-client for incorrectly and unreasonably concluding that IR35 does not apply, there can be no liability for incorrectly concluding that IR35 does apply, as there is no IR35 liability to transfer in a case where IR35 does not apply.
This will inevitably lead to the safe approach of end-clients concluding that all PSC contractors are caught, so as to avoid any potential liabilities under the new debt transfer rules. This will be unhelpful to agencies trying to recruit PSCs in the public sector.
Implications for agencies
There is also now a positive obligation on the worker (not the PSC) to inform the person paying the PSC whether the IR35 conditions of liability apply. For a limited company this means whether or not the worker has a “material interest” in the company (generally holding 5% or more of the shares). If the worker does not explicitly inform the agency that the conditions of liability are not met, the agency has to assume that they are.
This has potentially huge implications for any agency paying any intermediary, whether it is a PSC, an umbrella company or any other form of intermediary. It is often assumed that IR35 is targeted at one-person service companies, but technically the rules can apply to any intermediary, including an umbrella company.
The reason IR35 does not apply to umbrella company workers is typically because the worker does not have a material interest in the umbrella company and/or because the worker is drawing all remuneration as salary under PAYE. However, the latter is irrelevant under the new rules, and the “material interest” test is deemed to be met unless the worker explicitly confirms otherwise to the fee-payer.
It remains to be seen whether this is just careless drafting, or whether HMRC will actually use this aspect of the legislation to seek PAYE from an agency under the IR35 deemed salary rules in a case whereby, say, an umbrella company supplying a public sector worker fails to meet its PAYE responsibilities.
Anybody who had the bright idea of inserting another intermediary into the supply chain just to pay their PSC, so that they could avoid deductions being made will be foiled. Offshore entities and companies associated with the PSC are ignored when it comes to deciding who the fee-payer will be for the purposes of the new rules.
The debt transfer provision remains as per the original draft, with the added specific provision that a fraudulent written statement from the worker that the IR35 conditions of liability mentioned above are not met results in a transfer of IR35 responsibility directly to the PSC. Bizarrely, given the absence of any appeal provision, in a case whereby an end-client makes an incorrect blanket decision that IR35 applies, providing a deliberately incorrect document and taking the IR35 responsibility back onto its own shoulders might be a PSCs best option to avoid the unwarranted deduction of PAYE.
There are also some other technical changes to the way the IR35 “caught” payments are processed, the interaction with the managed service companies (MSC) legislation, and an exclusion for statutory auditors.
For more detail on these aspects see the Chartergates newsletter.
About Matt Boddington
After a 10-year career with HMRC, Matt established himself as a leading tax consultant with Accountax before founding the legal services consultancy Chartergates with Mark Taylor in 2012.