The Treasury has informed Government Departments that the controversial business entity tests should be the basis of assessing freelancers tax status when contracting with them. (See: HMRC's business tests at heart of new rules for contractors - Sept 2012, Shout99).
HMRC’s Business Entity Tests
APSCo told the officials of their concerns regarding the stability of the public sector supply chain due to the new guidelines, particularly citing the use of the Business Entity Tests as the method by which limited company contractors can show that they are paying the 'correct level of tax'.
APSCo made HMRC aware of its concerns regarding the scoring of these tests, which, it said. is disproportionately weighted against 'personal service companies', so most PSCs would fall into the medium or high risk categories. APSCo also expressed their unease about the ability of public sector hiring managers to make the complicated determination relating the tax status of off-payroll contractors.
The agency group was also worried about the amount of information which would be fed back to HMRC because the hiring managers were not able to assess the information provided.
An official from HMRC explained that they were not providing an assurance service for other Departments and would only expect to receive information about an engangement where the contractor has failed to provide the appropriate assurance. HMRC was clear that the guidelines are not a 'sampling exercise' on their behalf.
HMRC confirmed it has already been provided with all the information collated during the Treasury Review on off-payroll arrangements, and this data is being put through HMRC’s risk assessment process.
The Treasury’s expectation
It seems that the Treasury will require all Departments to include contractual terms within their arrangements with freelances which allow them to seek assurances about the tax status but they are not expecting this to be done in every case.
While the Treasury seems to be looking for a 'sample' to be checked, this is at odds with what many agencies and contractors are expecting.
APSCo said: "HMRC were clear that the Treasury guidelines are not about tax avoidance, but rather about stopping disguised employment. We are certain that there is a clear understanding within HMRC and Treasury that not all off-payroll arrangements constitute tax avoidance, although there is clearly some way to go in getting this message across in the political arena, as borne out by the findings of the Public Accounts Committee report." (See: Parliamentary Committee launches attack on freelancers Oct 2012, Shout99)
HMRC’s free contract review service
If contractors are asked to give information regarding their tax affairs to their public sector client, APSCo thought that HMRC’s free contract review service might be 'a cost-effective and quick solution' although in the past contractors have been wary of using any HMRC-based facility for fear that it would trigger an investigation.
However, APSCo said its has a clear statement from HMRC confirming that this service is totally confidential, and separate from the IR35 investigation team.
The Treasury is interested in receiving feedback from APSCo's agency members who operate in the public sector on the effects of these guidelines on the supply chain.
The guidelines will be reviewed in April next year but this review is more likely to be focused on ensuring the guidelines have been implemented rather than the level of disguised employment uncovered.
For general coverage of IR35 policy and cases, see Shout99's News on IR35 section.
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Susie Hughes © Shout99 2012