Welcome to Contractor Corner, the series written specifically by Qdos Contractor for accountants with clients who are contractors
Immediate Exchequer risk needs to be addressed
The minutes from the latest IR35 Forum held on 11 December 2017 demonstrate HMRC’s urgency to implement further IR35 reform into the private sector.
From April 2017, the manner in which the ‘Intermediaries’ Legislation’ (IR35) is managed, was changed for those operating in the pubic sector, such as for the NHS, TfL, local councils, and government departments. The end clients in the sector were given the responsibility for determining the IR35 status of their contractors, whilst the fee-payer (usually a recruitment agency) became required to deduct any relevant PAYE and NICs from the contractor’s fee prior to paying them.
This resulted in a multitude of issues including blanket inside-IR35 determinations by the end clients, forced use of umbrella company solutions, mass walkouts and project delays, and administrative nightmares for all involved.
Since it was introduced in 2016, the opinion has long been held that the reform was a test and would therefore be extended into the private sector in due course. The Autumn Statement later on in the same year confirmed these predictions, suggesting the potential extension of the reform into the private sector alongside a review of employment status which is used to separately determine tax and employment rights – all to be consulted in 2018.
Although there will be an impact report and consultation process for IR35 reform into the private sector, as well as a related discussion paper and set of consultations in response to Matthew Taylor’s report on employment practices in the modern economy to consider longer term reform, which has since been published, it seems that this might simply be a case of adopting due diligence.
Members of the Forum voiced their fears that introducing further reform would simply act as a sticking plaster and would fail to properly resolve the issues in the long term. However, HMRC responded by stating again that there is an “immediate Exchequer risk which needs to be addressed”. HMRC stated that the cost to the Exchequer of non-compliance with the off-payroll rules is estimated to be £1.2billion by 2022/23.
The recent IR35 reform is still being advertised by HMRC as a great success, because ‘compliance’ within the public sector is increasing. This is despite the fact that many public sector organisations are adopting blanket inside-IR35 decisions.
The CEST tool – HMRC’s online test for determining IR35 status – was yet again criticised for failing to consider a key test used to determine employment status for both tax and employment rights; Mutuality of Obligations (MOO). HMRC stated that this is because it is assumed that MOO exists on the basis that it is necessary for a contract to exist. This does not grasp the concept of mutuality of obligations and many Forum members who challenged this opinion shared a similar view. HMRC will provide a ‘considered response’ to the questions raised over this issue.
The key word within the Forum minutes is ‘immediate.’ It’s clear that HMRC are set on introducing further IR35 reform as soon as they possibly can. The consultation process is necessary, but regardless of the outcome, IR35 reform in the private sector is on the way.
- Kate Hardy, Consultancy Manager, Qdos Contractor
What is an Office Holder?
Sometimes contractors take on far too much responsibility within an end client’s organisation, more than what should be expected of them as a contractor. It is important to remember that a contractor must be acting at arm’s length within the end client’s organisation. However, with some contractors this is not always the case.
Where a contractor takes on the role of ‘director’ within the client’s organisation, it is important to determine whether they are undertaking an office-holding position or whether this is simply a job title. When establishing whether the ‘office holders’ rule applies to an engagement, it is important to consider the following:
- Was the role they are being engaged to provide in existence before they were engaged, and will it remain after their engagement comes to an end?
- Were/will they be appointed to the board of directors?
- Do they have any director responsibilities within the client’s organisation (such as voting rights, responsible for subjects and high-level management decisions)?
There is no statutory definition of an office holder, however it has judicially been defined as a “permanent, substantive position which had an existence independent from the person who filled it, which went on and was filled in succession by successive holders.” (ESM2500).
Examples of positions which are likely to be office holdings can be found in ESM2503, but include a Company Director and Company Secretary.
If a contractor is deemed to be taking an ‘office holding’ which has been created by statute, the contractor’s earnings for this engagement will always be subject to class 1 NICs but does not automatically mean that they are caught by IR35 for tax purposes.
If a contractor can prove that there is a lack of requirement for personal service (i.e. they have a genuine right to provide a substitute or have exercised such right) then they could still be considered to fall outside of IR35 and would not be subject to PAYE tax as though they were an employee.
Having said this, being an office-holder could make the defence in an IR35 enquiry much more tricky due to the high level of responsibility the contractor may have within the client’s organisation, and it may therefore be difficult to demonstrate that the right of substitution exists in reality. Where a contractor is holding an office, and does have a genuine right of substitution, we would always advise that the right is actually exercised if possible.
If the contractor has simply been provided with a job title, but is not a board appointment, then the contractor should simply request a more service-related description, rather than being given a title, and ensure that the services do not necessitate complete integration within the client’s organisation.
- Sophie Withers, Contracts & Status Specialist, Qdos Contractor
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