Last month the government published both the results of its latest consultation on IR35 and the draft legislation. So with time to digest, any surprises?
No, not really. But we now have some greater degree of certainty as to how the new rules will apply. Here are some key points:
Is it definitely happening?
Anyone who still nurtured a lingering hope that a government in difficulty enough on so many other counts might change its mind on this one will be disappointed. The private sector will be brought into line with the public sector with effect from 6 April 2020. The changes will apply to payments made from that date, meaning that it will be relevant to pre-existing contracts as well as new ones. In other words, end-user clients will need to determine whether IR35 applies to any of their existing contractors as at 6 April 2020 as well as any new ones taken on after that date. If you want to amend your contracts and/or PSC contractor practices, therefore, now is your moment.
IR35 status determination
The end-user will need to decide whether each of its PSC contractors would have been an employee if engaged directly (i.e. without the PSC). The end-user will then need to provide a "status determination statement" to both the party it contracts with (e.g. an agency or the PSC itself) and the individual worker. The statement must include the result of the determination and explain the reasons for that conclusion. End-users will need to consider carefully how they set out their reasons in the statement in a way which both satisfies the legislation and minimises the risk of disputes (see below).
Each party in the chain (if there is one) will then need to pass on the determination document until it reaches the entity actually paying the PSC. A party which fails to pass on the assessment in this way will potentially be liable for any PAYE/NI due under IR35.
The draft legislation provides that if either the person paying the PSC and/or the worker makes representations that the end-user's determination is incorrect, the end-user must consider its determination again in light of those representations and within 45 days either change it or give its reasons for deciding that its original determination was correct.
This is good news for end-users in that they do not have to implement any more involved process to deal with disputes. However, it is bad news for contractors/agencies who were hoping there would be a right to challenge that gave them any real chance of changing an end-user's mind (e.g. with HMRC or some other body acting as informed referee). It is to be hoped that the guidance proposed to accompany "new" IR35 will offer some help in terms of the degree of detail which the end user must provide in its initial determination or its decision on any challenge to it, but remember that we might not see this until a few months or weeks before 6 April.
The most controversial part of the consultation document was the proposal that the tax liability could move back up the supply chain to the end-user client (or the first agency in the chain) even though it had fully complied with the requirements of the new regime. For example, if the client makes a correct assessment of "inside IR35" but an intervening agency paying the PSC does not account for the correct PAYE/NI and then goes bust, could HMRC then recover the underpaid PAYE/NI from the client?
It has been confirmed that this will indeed broadly be the position. It's not about the money, apparently – HMRC merely wants to motivate businesses in the supply chain to introduce rigorous controls and procedures, it says, for example to be aware of and vet every entity in the supply chain. We are still awaiting some secondary legislation with the details and there may be some exceptions where the end-user is completely "innocent" (e.g. "in cases of genuine business failure, where deliberate tax avoidance has not occurred"). Note the user of the word "avoidance" rather than "evasion". HMRC is effectively extending its reach into areas where companies acting entirely lawfully may not be seen as innocent enough to escape a tax liability which properly belonged to someone else. Not about the money, though.
Moreover, it sounds as though at least some of these exceptions will be in the HMRC guidance rather than the legislation itself, which leaves concerns as to whether they will be binding or could be changed or just ignored by HMRC. Relying on HMRC to comply with its guidance is not a comfortable place to be when there are recent cases in which HMRC has argued that that same guidance was wrong! A concern will also remain that smaller intermediaries will be prejudiced as clients will only trust larger recruitment agencies which are more able to provide assurances on their credit rating. Job losses would seem inevitable.
Under the current public sector rules, end-users are not liable for giving an incorrect IR35 determination to another party in the chain if they took reasonable care in making that determination. This defence for the end-user has been maintained into the private sector also. It will therefore be important for end-users contracting with agencies to have a robust determination process so that they can show that they have taken reasonable care, even if HMRC ultimately disagrees with a borderline assessment. HMRC intends to set out in the guidance how an end-user can fulfil its obligation to take reasonable care. It will almost inevitably include putting the details through CEST [here].
Small end-user exemption
As expected, "small" private sector end-users will be exempted from the new rules (i.e. the PSC will continue to be responsible for operating IR35 as per the present rules). A company will be "small" for these purposes where it satisfies two or more of the following: turnover of not more than £10.2 million, a balance sheet total of not more than £5.1 million and not more than 50 employees. However, for unincorporated businesses only the turnover test will apply.
Check Employment Status for Tax (CEST) tool
Consistent with previous communications, the government is committed to improving the CEST tool and says that enhancements will be rolled out ahead of April 2020. The hope (but frankly not expectation) is that this happens sooner rather than later as end-users are already using the existing CEST tool to audit their arrangements. It also calls into question what happens if the new and "improved" CEST tool gives a different answer. For example, will public sector end-users be required to re-test all of their ongoing contractors under the new tool in case it gives a different result, or alternatively be allowed to take previously within-IR35 contractors back out again if the updated tool says they can? (This is of course hypothesis only – the chances that the CEST tool would be improved by HMRC to its own detriment seem vanishingly small).
Affected parties should press on with their preparations in the lead up to April 2020. Although the legislation published is stated to be draft only, the likelihood of material changes to it from hereon in is minimal.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.