Welcome to Contractor Corner, the series written specifically by Qdos Contractor for accountants with clients who are contractors
IR35 reform – overseas clients
HMRC issued the draft IR35 legislation in July, confirming that they plan to continue with the proposed reform. In April 2017, the IR35 rules for a Personal Service Company (PSC) providing services within the Public Sector changed and, from April 2020, these rules will also apply to medium and large private sector clients.
PSCs will no longer have the ability to determine their own IR35 status, as the IR35 changes shift that responsibility to the end client.
Given that, at last count, it was estimated that 45,000 contractors worked with clients in the EU but paid tax here in the UK, many contractors are now curious to know whether the April 2020 IR35 reform will affect them. The simple answer is yes.
In March 2019, HMRC published their consultation document which highlighted some key areas of the reform. These areas include:
• The ‘small company’ exemption.
• Identifying the responsibilities of each party in the labour supply chain.
• Addressing non-compliance.
• Consideration with regards to determination disagreements.
• How the rules will apply in relation to ‘contracted out’ services.
Most of the issues raised above have been clarified in the recently published draft, namely:
• The small business exemption – criteria confirmed.
• Confirmation of where the IR35 liability lies and at what point it shifts to another party in the supply chain.
• Provision put into place for any disagreements with a determination.
• Contracted out services (Managed Service Providers) will not be subject to the new rules.
As expected, there are still many grey areas within the new rules with some scenarios not considered at all. An example would be whether the reform will affect those contractors with overseas end clients, a question posed by many PSCs. The answer to that question can be found within the ‘anti-avoidance’ section of the consultation document which states as follows: “Where the agency or third party that would be the fee-payer is offshore, the liability moves to the next person above them in the contractual chain which is in the UK. If only the client is in the UK then they will be the liable party. Where a party in the contractual chain, including the client is outside the UK but the off-payroll worker performs services in the UK, fee-payers must still deduct tax and NICs.”
In the past, the jurisdiction of the end client had very little impact on a contractor’s status as IR35 was the responsibility of the contractor only (based on their UK tax obligations). However, this new statement suggests that if both the fee-payer (typically the recruitment agency) and the end client are outside of the UK, the fee-payer will remain liable with regards to the IR35.
Therefore, using an overseas intermediary will not avoid the new rules. There is some confusion around what happens if the contract is direct and there is no UK-based intermediary in the chain, but given HMRC have no jurisdiction overseas it is likely that the responsibility will fall back to the contractor.
Qdos recommends that all contractors start discussions with their agencies and clients regarding IR35 from the outset. Undertaking a contract and working practices review to demonstrate your compliance may help your end client understand their new obligations; as may the CEST tool; however, this is not mandatory and given that it has been overturned in an IR35 tribunal and described as “irrelevant” by a HMRC official, it might be worth considering alternative methods in assessing your status.
A new consultation on the new draft legislation runs until 5 September and Qdos will be submitting a response in due course.
IR35 draft legislation published
The contractor community has been eagerly awaiting the draft legislation for IR35 reform in the private sector which was published on 11 July, outlining HMRC’s specific plans for the changes.
As expected, HMRC did not introduce anything ground-breaking into the proposed legislation, a similar version of which was introduced into the public sector in 2017.
From April 2020, the responsibility of determining a contractor’s IR35 status will shift to the end client with small private sector companies excluded from the legislation.
A ‘small’ company must meet two or more of the following criteria in a tax year:
• A turnover of less than £10.2m.
• A balance sheet total of no more than £5.1m.
• No more than 50 employees.
It is important to note that subsidiaries cannot qualify as a small business if they are part of a larger group.
Whilst the legislation largely follows that currently experienced in the public sector, a few key details have been added which will also apply to the public sector, bringing both rules into line:
• End client organisations are to provide a ‘status determination statement’ for each contractor and the next party in the chain (usually the recruitment agency supplying the contractor business). The statement must outline whether the client considers the engagement to be inside or outside of IR35 and provide details as to how that decision was reached. Until the status determination statement is provided, the end client will be considered the ‘fee payer’ remaining liable for the necessary tax payments. It is hoped this approach will deter end clients from using blanket determinations which saw thousands of contractors being deemed as inside of IR35 when the public sector reform was introduced.
• The draft legislation has outlined a channel in which contractors can appeal against a determination. Whilst HMRC do not appear to want to involve themselves in such a process, contractors are given the opportunity to overturn what they view as inaccurate decisions via a client-led disagreement process. The client has 45 days to respond to a disagreement and must provide its reasons for any decision. If the end client fails to adhere to this process, they will then become the fee-payer carrying the IR35 liability.
• HMRC will publish supporting guidance to clarify ‘reasonable care’ – a term used throughout the legislation including in the public sector but yet to be defined by HMRC. Qdos regularly object to the lack of a clear definition and it is hoped that having one will help combat blanket decisions and clarify the expectations of clients making determinations.
A further consultation on the draft legislation is now open as a result of its publication and Qdos will be providing a response to the proposed reform; the closing date of this being 5 September 2019.
Qdos strongly disagrees with the incoming changes and do not believe it is a necessary or fair course of action. Looking ahead, the likelihood of a U-turn or delay is slim and private sector end clients should begin to prepare for the changes in time for April next year.
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