Welcome to Contractor Corner, the series written specifically by Qdos Contractor for accountants with clients who are contractors
IR35 reform in the private sector set for April 2020
The Autumn Budget 2018 took place on 29 October, when it was announced that the off-payroll rules in the public sector will be extended to the private sector; this will be delayed until April 2020.
This time, the changes did not appear just in the notes of the Budget (the Red Book), but Philip Hammond made specific mention to further IR35 reform in his Budget speech by stating that: “The off payroll working rules – known as IR35 – are designed to ensure fairness so that individuals working side by side in a similar role for the same employer pay the same employment taxes. Last year, we changed the way these rules are enforced in the Public Sector. But widespread non-compliance also exists in the private sector. So following our consultation, we will now apply the same changes to private sector organisations as well. But after listening carefully to representations made during the consultation, we will delay these changes until April 2020 and we will only apply them to large and medium-sized businesses.”
The notes in the Red Book mirror the Chancellor’s comments, denoting that from 6 April 2020 the off-payroll rules will be rolled out to the private sector. Some important points to note are:
• Only contractors working for a medium/large end client will have their employment status determined by their client. The criteria for determining the size of a business will be similar to that defined in the Companies Act 2006, which requires two of the following to be met –
o Net turnover more than £10.2million
o Balance sheet total more than £5.1million
o Employs more than 50 employees
• If it is determined that IR35 applies, the ‘fee payer’ will be responsible for deducting PAYE and NICs at source from the income paid to the contractor.
• The reform is not retrospective.
• There will be a further consultation to ‘refine the design of the reform’ which is expected in Summer 2019. Amendments to the operation of the rules are likely to be made, which will apply to both private and public sectors.
The ‘Summary of Responses’ document to HMRC’s consultation on IR35 reform in the private sector (which closed in August) was also published and a total of 275 responses were received by the government.
The document begins with a foreword by Mel Stride MP who reiterates that “the off-payroll working rules do not affect people who are genuinely self-employed”, much to the dismay of many contractors who were forced to work inside of IR35, following the implementation of the off-payroll rules in the public sector.
HMRC spout the same figures which have been promoted lately: “only 10% of personal service companies that should be applying the rules are doing so”; and “the cost of non-compliance is increasing and projected to reach £1,3bn in 2023-24”. However, the government finally appear to recognise that there are weaknesses with the off-payroll rules in the public sector, which they are looking to resolve prior to further reform being implemented in 2020.
To combat concerns raised by respondents regarding blanket determinations by end clients, the government will look to evaluate how businesses adhere to the ‘due care’ provision, how there could be consequences for failing to do so and ensuring there are no incentives for making incorrect determinations. HMRC stated that: “The government is aware of concerns that businesses may use blanket decisions for the employment status of groups of workers in similar roles without recourse, should those decisions be incorrect. The Government intends to explore options for the consequences of businesses failing to use reasonable care in making their decisions.”
The Government also seemed to acknowledge the serious inadequacies with the Check Employment Status for Tax (CEST) tool, stating that: “HMRC is looking at where the CEST tool, along with wider guidance might be improved… HMRC will work in collaboration with stakeholders to better understand the concerns about CEST raised in response to this consultation; those included, saying more about mutuality of obligation, how to treat multiple contracts and clarifying the language used in places.”
While it is positive that HMRC finally recognise that there are issues with the CEST tool, many will agree that this will not be enough to properly improve the tool, which needs to more closely follow case law.
With regard to actually improving the enquiry process, respondents “suggested that targeting off payroll workers in particular sectors thought to represent higher risk of non-compliance would be beneficial,” and it appears that this stance has already been adopted by HMRC, in opening many enquiries into personal service companies operating in the entertainment industry.
HMRC have also confirmed in writing that where a contractor is deemed inside IR35 by their client, this will not automatically trigger an enquiry into earlier years, and they will not carry out targeted campaigns of this nature.
Despite Mel Stride’s comments, Qdos recognise that the off-payroll working rules will of course affect people who are genuinely self-employed. However, we also believe that those who are genuinely self-employed should still be able to operate outside of IR35 and continue to run their own business, and we will continue to support contractors and businesses alike to ensure that genuinely self-employed contractors are treated as such and that clients can continue to engage the flexible labour they need.
• Thanks to Qdos Contractor for this article
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