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The public sector rules have been the subject of criticism and accusations that they were 'not fit for purpose' since their introduction. All sectors of the contracting industry have argued against their extension to the private sector. However, it appears their pleas have fallen on deaf ears.
Key differences from the public sector legislation is the additional responsibility on the end client and how the legislation deals with non-compliance within the supply chain.
Tax specialists, Qdos, summarised the main changes:
- HMRC introduce the ‘status determination statement’, which means end-clients must provide a statement which says whether or not it believes IR35 applies to both the contractor and the party directly engaging the workers - which will often be the recruitment agency - as well as the reasoning behind the decision. Until this is provided, the end-client will be classed as the fee-payer and responsible for deducting the appropriate tax and NIC from the contractor before paying this to HMRC, as well as liable for tax and NICs.
- Further details of the client-led disagreement process which was presented in the latest consultation have been confirmed which will require the end client to review a decision and provide reasoning for the outcome within 45 days of a contractor or fee-payer disagreeing with an IR35 decision. If the end-client fails to do this, they will then become the fee-payer, meaning the IR35 liability will transfer to them.
- Within the supporting documentation, HMRC have indicated that we can expect further guidance on the 'reasonable care' clause which requires reasonable care to be taken in arriving at a determination despite no definition being given to date.
ATT - further work
The Association of Taxation Tehnicians (ATT) broadly welcomed the proposals but insisted that further work must be done to ensure that businesses are ready.
Michael Steed, from ATT said: “We welcome some of the pragmatic changes which HMRC have introduced following consultation. In particular, requiring the end-user client (the engager to whom a worker provides services) to pass the reasons for the status determination, as well as the determination itself, to both the party it contracts with and the worker. This should provide more transparency and help to reduce the risk of incorrect or blanket status decisions being taken.”
The ATT has previously expressed concerns about proposals as to from whom and how HMRC could seek to recover unpaid tax and NICs where the off-payroll rules are not applied correctly.
HMRC’s proposal is that liability would initially be transferred to the first agency in the chain, and then back to the engager if required.
Michael Steed said: “We are pleased to see HMRC indicate that these proposals are not intended to transfer liabilities in cases of genuine business failure, where deliberate tax avoidance has not occurred. But the final legislation and accompanying guidance will be key in ensuring that this is indeed the case in practice.
“While we welcome these changes, made following previous consultation, and HMRC’s ongoing commitment to work with stakeholders, we would stress that there remains much work to be done to ensure that private sector engagers, agencies and those working through personal service companies are both aware of the changes and ready for them by April 2020.
“Key to the success of these reforms will be the promised improvement to HMRC’s Check Employment Status for Tax (CEST) service, as well as the level of practical HMRC support available to affected businesses both in the run up to, and after, April 2020.”
Paystream - responsibility
Julian Ball, PayStream’s Legal Director says; “The industry was expecting this and there was nothing completely unexpected. That said a lot of people have held off taking any positive action until the legislation was published.
Paystream said that the latest tranche of legislation brings an almost identical approach to the application of IR35 to that used two years ago in the public sector. In that respect the main IR35 tax liability lies with the person paying the PSC (the fee payer) which is usually the agency.
It says that one of the key differences from the public sector legislation is the additional responsibility on the end client who now has to:
- Carry out a ‘status determination’ as to whether an assignment falls inside the IR35 rules;
- Communicate the determination down the chain to the MSP or agency it deals with and ultimately to the PSC;
- Retain evidence of how it reached its determination;
- Provide the evidence to the PSC or agency if asked to do so; and
- Deal with any appeal against its decision (within 45 days).
Julian Ball, from PayStream said: “In the public sector end-clients felt that they had insufficient time to prepare their processes to carry out these checks accurately which in some cases led to blanket determinations that everyone was inside IR35. This clearly disadvantaged some contractors who had no statutory right to challenge these decisions. The Government has acknowledged that this was not fair hence the introduction of the appeal process and right to information”.
Another key difference is how the legislation deals with non-compliance within the supply chain. The expectation was that HMRC would seek to transfer liability up the chain where it could not recover tax from the party in default. This has been borne out by a far-reaching provision (Section 688AA) enabling HMRC to go after any person who was ‘party to the arrangements’ in which a payment was made in the event that PAYE/NIC cannot be collected from the appropriate entity.
Julian Ball said: “This is not a huge surprise since one of the main reasons for the introduction of the legislation was HMRC’s historical difficulty in enforcing IR35. Even when HMRC succeeded in winning a case there was often no money left. What this provision does is to allow HMRC to go after a client where, for example, an agency is insolvent. This will make clients doubly careful about who they deal with.”
Paystream felt that there was at least one positive element of the proposed legislation. That is the decision to leave out the requirement for the end-client to operate the new rules if they are ‘small’, a concept defined mainly by the application of the definitions in the Companies Act. The Finance Bill outlines in some detail how the ‘small’ criteria is used for new companies and those transitioning to ‘medium’ or ‘large’ which will be within the scope of the new rules. As is usual with these ‘grey’ areas there are anti-avoidance rules which come into play.
Optionis - disappointed
Mark Beal-Preston from Optionis Group which includes acountants Nixon Williams, said: "We're disappointed to see that many of the key concerns raised by the contractor community have been overlooked with this draft legislation. It now appears unlikely that there will be a shift in the policy or plans to implement these reforms in April 2020, and the big question for the industry is will businesses be ready in time to implement these changes without unintended consequences?
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"Across the industry, there is still a distinct lack of understanding about the new rules - from contractors to recruitment agencies and end clients. There are still question marks hanging over the reliability of government's CEST tool and if it can really make the necessary changes needed to provide accurate assessments in line with case law, as well as delivering planned education on how to prepare businesses in time."
APSCo - More clarity
Agency group APSCo, also voiced disappointment that fee payers will be liable for incorrect status determinations of PSC contractors.
Samantha Hurley, said: "While the draft legislation is largely in line with our expectations, we at APSCo are extremely disappointed that fee-payers will shoulder the liability of incorrect status determinations – particularly as this is at odds with what was anticipated. It is frustrating that recruiters will, in most cases, continue to bear the brunt of liability in the supply chain whether as the fee payer or the first tier supplier.
“We also believe there should be more clarity around the meaning of a status determination statement. At present, the client ‘complies’ if it provides the decision with reasons to the party contracting with it in the chain and the worker – regardless of whether HMRC ultimately decides the decision was correct – but how much detail should go into this reasoning? Similarly, the legislation states that ‘reasonable care’ should be taken, but there is not yet any certainly around what ‘reasonable’ should look like. In our view, there is still too much room for manoeuvre.
“We welcome the fact that the criteria which defines entities which are ‘small’ – and so exempt from the changes – has now been more clearly defined. However, there is no statutory obligation on the client to notify the parties in the chain that they are small and commercially this will be problematic.”
Tania Bowers, Legal Counsel at APSCo, added: “The recent case of radio presenter, Paul Hawksbee, who successfully challenged a deemed tax bill of around £140,000 in an IR35 tribunal, is the latest in a long line of stories which indicate that HMRC has little grasp of its own rules. The ambiguity within the latest legislation will do little to ease this sentiment.”
Further IR35 information
For more information about all aspects of IR35, including the controversial IR35 reforms see Shout99's News on IR35 section.
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Susie Hughes © Shout99 2019
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