Canada: IR35 – What's New And What To Do

In this podcast we discuss the IR35 changes coming in April 2020. We cover HMRC's response to the consultation, what we can learn from IR35 in the public sector and how private sector organisations can prepare now.

Siobhan Bishop: Hello and welcome to our podcast where we are covering an update on IR35.  This podcast will focus on the latest developments, the key issues and how to mitigate those risks.  I am Siobhan Bishop a principal associate in the Employment, Labour & Equalities team here at Gowling WLG and I am joined by Zoe Fatchen, a partner in our tax team.  The IR35 legislation aims to prevent what the Government considers to be tax avoidance.  Where individuals avoid paying income tax and National Insurance contributions by supplying their services through an intermediary, usually through a personal service company, rather than actually being an employee directly and HMRC think about 90% of consultants in contracts should be taxed as employment.  So Zoe this isn't the first time we have looked at this, we have had public sector rule changes back in April 2017 and what are the lessons that have been learned from the public sector IR35?

Zoe Fatchen: Hi Siobhan, well yes, as you say, the public sector rules changed in April 2017 and that caused quite significant disruption at the time and as a result of having had two years under that regime various things have been learned by the parties involved.  For one thing, it has been very clear that trying to assess individual contractors and individual contractual arrangements can take a considerable amount of time particularly when the nature of those contractual arrangements, or indeed the nature of the work that is being undertaken, is very varied. What we have seen is that some public sector bodies and in particular some NHS foundation trusts, which want to be seen quite rightly as complying fully with their tax obligations, have taken the very conservative and careful view of applying blanket determinations in respect of all their contractors. For some contractors that would be the right decision, for other contractors very clearly not the correct decision. So that provides two lessons, firstly that blanket determinations are not always the best way to go for individual contractors but secondly, because of the way that the rules were prepared and implemented, it is quite difficult then for individual contractors to go back to the public sector body and to make representations to say that in a particular case the arrangement should properly be treated as falling outside the scope of IR35. So when the recent consultation took place in connection with the private sector extension of these rules, one of the things that many of the respondents were very concerned about was, first of all, how do we disincentivise blanket applications of the rules in situations where that is not appropriate and secondly, what is a reasonable and proportionate way for contractors or contracting bodies which might disagree with the determination made by the client to appeal against that determination and to make representations seeking to have that decision reversed?

Siobhan: So we looked at the public sector and, as you mentioned, there is now this extension into the private sector, first announced in the Autumn budget 2018 that the IR35 rules would be extended and we now have HMRC's summary of the responses to the consultation, as you mentioned, and that was only published on 11 July this year. So what are the requirements going to be in the private sector?

Zoe: Well the requirements in the private sector will be very similar to those already in force in the public sector.  So the client, which is the entity in whose business the contractor will be working, will be the person from a legal perspective who is required to make the decision about whether the IR35 rules apply.  There has been quite a lot of discussion about that but ultimately the Government have come to the decision that it is the client who is best placed to make that decision because they will have the best overall understanding of the role which the contractor is undertaking, the way that those arrangements are structured and the ways in which that contractor relationship differs from the employment relationships that they already have within their business. So the government has determined that it is the right decision to have the client making that determination even though ultimately in many cases if IR35 does apply it would not be the client who is responsible for accounting to HMRC and paying the tax.  So one obvious follow on from this is of course if you have got someone who is liable to make the determination but not liable to account for the tax does that not then incentivise the client to make determinations and be very conservative and careful, in the same way as some of those public sector bodies we have already discussed, and to apply blanket considerations. So the draft legislation and the guidance which we are expecting to be published, and which will evolve going forward, will need to address that and to put in safeguards to make sure that these determination are made on a proper and reasonable basis.

So as to the scope of the reforms themselves, the first and probably one of the most significant points which is raised by the consultation and the responses, relates to what is a small organisation which falls outside of the rules? So the definition for "small" is one which relies on the Companies Act 2006 which, as you can imagine, works very well for companies not quite as well for unincorporated associations. So the consultation asks questions about that and in the responses it was clear that for some unincorporated associations they are not used to applying the kind of tests which are relevant for the purposes of the Companies Act definition and so the Government has said that for unincorporated associations the rules will only apply where the turnover each year for that unincorporated associations exceeds £10.2 m.  So that is a welcome simplification to the proposals as they were previously understood. 

The next question relates to information requirements. The question is who should the client be informing about the determination they have made and also what should be provided by way of reasoning because, of course, it is very important that not only is a contractor informed about whether they fall within the rules but also the reasons why because without those reasons why it is very difficult then to go back and challenge it in circumstances where that might be thought necessary.  There were two proposals in the consultation, firstly that the information might be supplied and passed on down the supply chain from the client to the first agency to the next and then ultimately to the personal service company and then to the worker, that was one proposal. The second proposal was that to mitigate any risk associated with breakdowns of communication within the chain that the client should also provide that determination directly to the worker. Not surprisingly, following those responses the Government has said that it is taking what I think is a pretty sensible belt and braces approach. So, on the one hand, the information is passed down the chain so that every entity involved in that engagement is aware of what the determination should be and then, secondly, it is also provided down to the worker and that, of course, is very important from a compliance perspective. One of the aims of this change in the rules is to address the non-compliance which the Government perceives to have historically taken place and so the PAYE and National Insurance liabilities will sit with either the personal service company or, if the personal service company has not properly received the determination and received the reasons, it will sit with whichever was the first party in the supply chain which has failed in its obligations to pass on that information. Then, if the initial party still doesn’t comply, those liabilities bounce back up the chain where they cannot be recovered from the entity that should properly be paying under the rules.

So this transfer of liability, as you can imagine, has caused quite a lot of discussion and consternation because we end up with compliant tax payers effectively bearing the administrative and cost burden of others further down the chain who are not complying.

But what this does of course is to incentivise the members of the chain to take steps to secure proper compliance by others and that could, for example, be by including provisions in the contracts between them with specific indemnities in there so that if one contracting party is forced to pay the tax because another is not compliant, then they will have a right under contract to recover those costs. 

So the next issue then relates to the making of correct status determinations and taking reasonable care.  There was obviously some concern about the additional work it would take where there was a client led status disagreement process.  For example, it was going to be necessary to train staff within the client organisations to deal with those representations from contractors and particularly contractors who throughout their careers have always been treated as working on a contractor basis and on whom ultimately those costs will fall. It is clear to see that there will be some push back in many cases from people who do not necessarily have the expertise themselves to understand the rules, they simply understand what has always been the case for them and therefore there will be some education required there. Status disagreement processes, which could themselves create additional burdens, may again incentivise blanket determinations on the basis that what is 

saved by issuing a blanket determination may outweigh the inconvenience of having a few circumstances where the contractors push back. 

What the Government has said is that where you have a group of off-payroll workers who are doing fundamentally the same things, in fundamentally the same way and under standard contractual conditions, in those cases actually it may well be appropriate to apply a blanket determination to everyone in that class. That does not mean that it is necessarily right to rule all engagements to be either within or outside of the rules regardless of what those contractual terms and the actual working arrangements might be.

The Government is of the view that in the public sector most authorities actually are making assessment on a case by case basis and they do not think there is evidence of blanket determination. So that is quite interesting that there are different views on that as between the Government and some of the respondents to the consultation.

Of course, most medium and large size organisations in the scope of IR35 will have their own HR or procurement functions who would be able to make employment status determinations because they will have to do it in the first place anyway in relation to employees they are taking on and in relation to other contractual relationships.

There are clear incentives for them to make accurate determinations but the stakes are higher now. In the past they could make a determination and follow a rule of thumb and if that was not correct, where you have a personal service company, it would of course by the PSC that would bear the tax and not the client.  I think the expertise is there but those tools are going to need to be sharpened because suddenly the stakes are much higher for those client entities concerned.

Siobhan: Thank you for that and the determination status clearly is a very important issue and I think it is really important to remind listeners that the status here between employment status for employment legislation is different to the status question we are talking about now, which is status for the tax purposes.  So it is employment status for tax purposes that we are looking at.  The HMRC has an online tool actually for checking employment status for tax and that CEST tool is used for checking contracts between a worker and the end client and how that contract is to be regarded for tax purposes.  How useful is that tool in reality Zoe?

Zoe: Well many businesses do use that tool and many of them have found it helpful.  We have had some reports that some businesses find it a bit of a blunt instrument because it was devised some time ago and of course it is necessary to look in detail at all the factors and all the circumstances and so, when there is a limited number of boxes, most of the analysis has to be done before the information goes into CEST currently.  Following on from that, when you look at the results you achieve by putting facts into CEST and then look at the actual results that come through determinations on an individual basis by officers of the revenue, or indeed by judges in tribunal, there are some differences there and there have been some criticisms by businesses and by advisors saying that perhaps CEST is not the answer to everything in the way that one might of hoped when it was first introduced.

However, in the consultation response summary provided by the Government itself there is some really helpful commentary which acknowledges the fact that a tool like CEST does need to be constantly updated and improved as more information is forthcoming. There is a helpful statement in there that the CEST tool is going to be updated, it is going to be subject to a constant process of evolution and specifically for the purposes of these new reforms to make it more useful to a wider range of businesses and specifically in a wider range of sectors because there are some sectors which had greater concerns than others about how useful that really is. So, for example, in relation to control and the degree of control that really differs greatly. In one sector the idea of autonomy for a worker might be quite strict because it is a highly regulated environment whereas in another sector they might have much more free and easy idea of autonomy. So one person's autonomy is another person's stricture and there are clear sector differentiations here and so one of the stated aims of the reform of CEST is to enable it to deal with those sector differences.  I think until we see those amendments, it is very difficult to give any opinion at all about how effective that is going to be so I think it is a wait and see. For now we would say, by all means use CEST but use it with care and be aware that it is not always a substitute for proper reasoned and detailed thought about the underlying circumstances behind a particular contractual arrangement as well as looking at what the contract itself says.

Siobhan: So it is clear that even though we are not going to have these reforms coming into place until April 2020, there is quite a bit of preparation that all parties need to be doing now. So what would you recommend that clients should be doing to prepare?

Zoe: Ok well there are lots of things that clients can do to prepare for the reforms. The first thing I think is to take a look at the contracts that are already in place and particularly contracts which are likely to be reviewed or renewed or to continue in operation past 2020.  Look at whether these are being administered centrally under a standardised protocol or whether they are being dealt with by different business functions in different ways because it is very important that whoever is responsible for engaging contractors is really aware of these rules and of the application of them and it is only by having proper oversight that businesses can really be careful and make sure that they are complying fully with those rules when they come into force.

When it comes to looking at new contracts that might be entered into now and which will still be in force in April 2020, there is a myriad of different things to look at but there are a few that we come across very often and some of them are quite tricky, others are quite what we would call easy wins as far as complying with the reforms is concerned. 

Now the legislation and therefore HMRC will always look at the arrangements as a whole, so there is no quick check list that says if you do these six things you will definitely fall outside the rules. In the same way that there used to be an idea that if you had a right of substitution in your contract that somehow made it an IR35 compliant contract and you did not have to worry about the rest.  That is clearly not the case and I think that myth was hopefully exploded quite some time ago.  We do need to think in detail about not just how things look but also how things are.  So we are looking at mutuality of obligation between the contractor and the client, we are looking specifically and very carefully at control of the 

way that the contractor operates. So where the work is done, the manner in which it is done, the timing, so think about those where, when, how and that degree of control will depend very much on the contractor and the role and the nature of the client entity. 

All the things that, if you are familiar with IR35 you will already know about, so provision of own equipment. As technology improves and the ability to put specific applications on to privately owned laptops, for example, improves, the ability to make sure that privately owned laptops have the required degree of cybersecurity safeguards on them increases, it becomes easier in many cases for contractors to provide their own laptops, as well as their own mobile phones, as well as their own vehicles and whatever else they might need for the job. Where they cannot provide their own equipment, there are businesses who are looking at charging contractors for the lease of equipment which meets their own requirements. 

Training is another one, there is clearly a big difference between giving someone the training they need in order to operate safely and properly on premises, for example, to comply with health and safety legislation and giving them specific skills related training for the better performance of their role, which you would normally expect a contractor who is not an employee to sort out for themselves.

Even things like the way that a contractor is identified around the business, do they have a security pass which clearly says that they are a contractor on it.  What do their business cards say, what do their email signatures say for example, is it clear to someone who is walking around the business that one person is a contractor and another person is an employee?  If that security card for an employee provides them access to a staff restaurant or staff canteen with subsidised meals, can the contractor access those subsidies or is that really an employee only perk?  All of those sorts of things need to be taken into account and then there are the smaller things which are not likely by themselves to be determinative, but which paint a picture. So do they come to the Christmas party?  How are their performance bonuses structured?  So, for example, an employee might receive a bonus at the end of the year because the business as a whole is doing well or because they have met particular individual criteria following an appraisal of their personal performance.  For a contractor, it might be more appropriate to incentivise them to perform specific tasks within an agreed time scale and if they get there on time and under budget, then there might be a financial benefit associated with that but that is very much linked to the performance of the contract and not the performance of the individual.

Siobhan: Thank you so much Zoe for all those real life examples and insights that you have given and especially for the recommendations on the kind of practical steps that organisations can be taking to mitigate the clear risks in this area. So thank you also to the listeners for joining us today and if you have any questions on IR35 please do get in touch with Zoe.

Zoe: Thank you very much Siobhan.

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