The level of focus among contractors on the introduction of private sector IR35 reform next year meant that independent workers and experts alike were ready to pore through the much anticipated IR35 consultation the moment it opened yesterday.
On the whole, the consultation gave us a firmer idea of HMRC’s specific plans for the introduction of further IR35 changes, which were announced by the Chancellor in the 2018 Budget.
IR35 specialists and contractors were hoping for the best, but in reality, weren’t too optimistic that HMRC would give any indication that it has learned from the mistakes it made when rolling out public sector reform in 2017.
Given the importance of the IR35 consultation, which is expected to inform the Draft Finance Bill and in turn the eventual rules for private sector changes, even the smallest of developments are worth paying attention to. In many respects, that’s all HMRC offered. That said, it was of no real surprise that the taxman seems intent on enforcing rules very similar to those in the public sector, despite the fact there is very little - if anything - to demonstrate that initial changes have increased IR35 compliance.
At a glance, here’s what emerged from the long-awaited arrival of the IR35 consultation, along with the impact these changes could have on contractors and recruitment agencies.
By excluding small companies from IR35 reform, HMRC believes changes stand a better chance of success. In the consultation, the taxman confirmed that small engagers would not need to prepare for reform and also defined what a ‘small company’ is.
The qualifying conditions are met by a company in a year in which it satisfies two or more of the following requirements:
While this is a move largely welcomed by sceptics, it remains to be seen as to how it will play out in reality.
In the public sector it hadn’t been officially confirmed that the intermediary in a contractual chain – very often a recruitment agency – carries the liability. The consultation, however, makes it clear that HMRC sees the agency as the party who will ultimately carry the can for any unpaid tax and national insurance, stating:
“We expect that agencies at the top of the supply chain will assure the compliance of other parties, further down the labour supply chain, if they are ultimately liable for the tax loss to HMRC that arises as a result of noncompliance.”
Providing that each party or parties in the chain fulfil their responsibilities, the liability will rest with the agency or intermediary closest to the end-client. This is despite the fact that this party will not be the one that has made the IR35 decision - this will rest with the end-client. Therefore, it’s absolutely vital recruiters ensure they are able to contribute to accurate assessments.
Experts, including Qdos, have often stressed the importance of joined-up thinking when it comes to administering IR35. While the consultation document doesn’t go as far to make this point, it does say that contractors and fee payers should be able to “seek reasons for a determination.”
For contractors, this could at least give them grounds to challenge any blanket, non-compliant or inaccurate assessments.
“The government considers it necessary to legislate to ensure that the determination – and the reasons for that determination – are cascaded to all parties within the labour supply chain, to ensure they comply with their obligations.”
Aside from the transferral of the IR35 liability (an initiative that hasn’t been particularly effective in the public sector), the consultation fails to propose new “deterrents” for what HMRC claims is a “small minority who may seek not to comply, or to enter into artificial or contrived arrangements with a view to circumventing the rules.”
“The government believes that extending these existing provisions would provide an effective mechanism for preventing and addressing non-compliance with the rules following the April 2020 reform.”
Incidentally, in the consultation, HMRC also states it “has not seen evidence to suggest widespread blanket decisions are being made in the public sector.” Following reports that blanket determinations are fairly commonplace (even nearly two years after the introduction of initial IR35 reform), contractors will no doubt disagree.
While the taxman does reiterate that blanket determinations are not the right approach, contractors will be concerned that HMRC maintains that across-the-board decisions can be applied to engagements with the same terms and conditions.
Qdos strongly disagrees with HMRC’s view and maintains that assessments need to be made on a case-by-case basis.
After public sector changes resulted in thousands of incorrect IR35 determinations (many of which were non-compliant blanket decisions) contractors understandably want to see engagers held accountable when making assessments without reasonable care.
HMRC fails to address this in the consultation, instead proposing a “client-led disagreement process” which would allow contractors to at least challenge engagers on IR35 status.
“The introduction of this stage would be the second step in seeking to resolve status disagreements, providing additional assurance to off-payroll workers and fee-payers that the client has not taken an arbitrary approach to determining status and has considered any evidence they may have to the contrary.”
Huge concerns remain over the reliability of CEST, the taxman’s IR35 tool. In the consultation, HMRC reiterated its plan to “work with stakeholders, including tax experts and businesses to explore enhancements to the Check Employment Status for Tax (CEST) service and associated guidance.”
On the face of it, any improvements made to the tool will be widely welcomed. But as contractors know, action speaks louder than words.
In conclusion, the information in the IR35 consultation could be considered somewhat predictable. Barring one or two new ideas - which you might argue aren’t particularly ground-breaking and do not solve the issues resulting from initial changes - at this stage, private sector changes look like they will mirror public sector ones to an extent.
With this in mind, it’s important that the sector prepares immediately and does not rest its hopes on HMRC for the support it needs. By taking the appropriate steps, these companies will be able to manage reform, engage contractors outside IR35 and protect the liability they will soon carry.
Qdos will be contributing to the consultation, which remains open until 28th May 2019.
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