Government publishes IR35 review response

'Light touch' on tax rules for the self-employed

The Government has published its eagerly-awaited response to the review into changes to the off-payroll working rules. However, despite having spent more than a month consulting on the extension of IR35 reform to the private sector and promising to “address any concerns” that affected parties hold, the findings are few and far between and ultimately, disappointing.

No penalties for 12 months

The most notable development is information relating to the “light touch” that the Chancellor said HMRC would employ when enforcing the rules for the first year. In the review document, HMRC announces that “customers will not have to pay penalties for errors relating to off-payroll in the first year, except in cases of deliberate non-compliance.”

While a number of IR35 experts have welcomed a so-called “softer approach”, it should be taken into account that ‘penalties’ are not necessarily tax liability that would be owed to HMRC as a result of inaccurate IR35 determinations. 

Given IR35 tax liability tends to be far greater than any financial penalties imposed by HMRC, zero penalties for 12 months should not change the way private sector companies manage IR35 reform.

Reform will not apply to “wholly overseas” contractors

The Government has at last provided clarity for contractors working with “wholly overseas” clients. They will retain the right to determine their own IR35 status after 6th April, as explained here: “The Government has listened to those concerns and will amend the legislation to exclude wholly overseas organisations with no UK presence from having to consider the off-payroll working rules.”

While further details will need to be provided to help contractors understand if a client qualifies as “wholly overseas”, it is an important update regardless. That said, this isn’t a concession made by HMRC to contractors - it’s because the tax office would not be able to police the rules overseas.

Other areas covered in the Government’s IR35 review response included:

Payment dates

The Government has reiterated that, after listening to stakeholders, the incoming rules will apply to payments made for services provided on or after 6th April, rather than payments made on this date, which would have likely incuded work completed in March.

Misinformation

The reported rise in the number of non-compliant IR35 schemes and inaccurate information being distributed hasn’t gone unnoticed by those who contributed to the review. In response, the Government said it will “address” the issue.

HMRC support 

The taxman has been criticised for failing to offer adequate support to contractors, agencies and end-clients, all of whom are impacted by the reforms. The Government has said HMRC will improve the “signposting to their guidance, as well as explaining the changes through webinars, letters, workshops and other material.”

While this would be a positive move, it is a promise that has been made before. Our advice is to not rely on HMRC for valuable guidance when implementing the reform.

Reform will not be retrospective 

Again, we knew this already. The Government has promised not to investigate contractors who shift from outside to inside IR35 as a result of the reform. However, given HMRC has previously said it will allow itself to scrutinise engagements where it “suspects fraud or criminal behaviour”, contractors mustn’t rule this out altogether. 

Client-led disagreement process

A disagreement process led by the client doesn’t give contractors a fair shot at overturning an inaccurate IR35 decision, given the client can effectively refuse to cooperate. The Government’s review response offered little, if anything, of value: “The legislation will be made clearer regarding the time limits for bringing a disagreement. HMRC have updated their guidance to make the appropriate use of this process clearer.”

Clarity on size of a company

Due to concerns held about how to determine the size of a company and if the reform applies, the Government is “legislating to place a legal obligation on clients to respond to a request for information about their size from an agency or worker.”

In conclusion, aside from promising not to enforce penalties for the first year and clarifying that contractors working with “wholly overseas” clients will continue to determine their own IR35 status, the Government’s IR35 review response has arguably fallen short. 

The full response to the IR35 review can be found on the Government website here.