** BREAKING NEWS 17th March 2020 – The Off-Payroll (IR35) private sector changes have been deferred until April 2021 – read more here. **
Many major tax and business groups have called for the IR35 off-payroll private sector reforms to be delayed until at least April 2021, as businesses simply won’t be ready to cope with the changes as things stand.
A consultation into the implementation of the April 2020 off-payroll legislation ran from March 5th until May 28th 2019.
Unlike the initial consultation, which ran in 2018, this second consultation sought responses on how the changes should be put in place – rather on whether or not they should be implemented in the first place (as that decision has already been made).
In simple terms, in a change to the way IR35 currently operate in the private sector, the off-payroll rules place the burden of deciding employment status from the contractor to the client. If caught by the rules, the client becomes responsible for paying employers’ NICs, and the tax liability is also shifted to the agency or end-client.
Whilst HMRC digests the submissions from a wide range of industry organisations and businesses, several major themes have emerged, including the need for a delay, and fundamental changes to HMRC’s online CEST (employment status) tool.
Here, we highlight the main themes, based on the responses published by prominent tax and business groups.
The IR35 off-payroll extension should be delayed
The original public sector implementation was rushed and plagued with difficulties. The private sector extension is way bigger, and April 2020 is far too soon for businesses to prepare. This is the overwhelming view of those organisations who responded to the consultation.
KPMG said although a delay is preferable, if the reforms to go ahead – as planned – next April, HMRC should review the new implementation after two years, “to allow for improvements in light of the learnings from tax returns submitted following the first tax year of operation.”
The ACCA says, in view of the current economic challenges facing the UK, “…it may be advisable to consider a delay to introduction to allow for changes to CEST (see below) to be digested and full consideration of the implications from the public sector reform.”
Similarly, freelance body, IPSE, says the decision to roll out the off-payroll extension now should be considered in the context of Brexit, as well as all the technical reasons why it should not go ahead. “Moving ahead with a measure that will restrict the benefits of the UK’s flexible labour market – one of our greatest economic advantages – risks damaging the economy at a time which is already challenging for businesses.”
Recruitment industry organisation, ARC, notes that the original public sector implementation has yet to be reviewed. It had been due to be reviewed by the Treasury Select Committee, but this was cancelled due to the last general election. The body says “… there has been no TSC review and this ought to take place before the Proposal is regarded as suitable. There has been no impact assessment.”
Leading accountancy body, ACCA, suggests a delay until April 2021, “with the changes to CEST trialled from late 2019 and a review of the operation public sector rules.”
We asked Dave Chaplin, CEO of ContractorCalculator, whether he thought there was a chance of the reforms being delayed:
“All the evidence overwhelmingly points to the need for a pause and rethink, otherwise the economy could be significantly damaged as a result of this new tax. Unfortunately, HMRC and HMT are refusing the listen, still misleading parliament and are in denial. Essentially it will come down to how many people go and have a face-to-face meeting with their MP and explain to them the real truths of the impact of this new tax. Urgency is necessary, so we are urging people to register with the Stop The Off-Payroll Tax campaign and visit their MP.”
CEST needs to be overhauled – urgently
In April 2017, at the same time as the off-payroll rules were rolled out across the private sector, the Government created an online employment status tool (now known as CEST), for clients and others to determine whether or not an individual assignment is caught by the IR35 rules, or not.
There are significant problems with CEST. It does not use all the necessary legal factors used in real-life when determining employment status (such as the mutuality of obligation), and cannot cope with multiple arrangements, and whether or not an individual is working ‘in business on their own account’.
The CIOT says unless CEST is overhauled to correct these glaring omissions, “…the lack of confidence in CEST will increase disputes between businesses and contractors and so lead to significant time and effort having to be expended by businesses, contractors, HMRC and the courts in trying to resolve them.”
KPMG says that unless changes are made, and the situations where the tool is unable to return a status decision are reduced to below 15%, …”there will inevitably be more disputes between businesses and contractors which will involve significant time and effort on the part of all parties, including HMRC and the courts, to resolve them.”
ARC, says that CEST “remains significantly unfit for purpose and is misleading.”
IPSE says “Implementation should be delayed until there is agreement that CEST generates accurate results.”
The Law Society says that not only should CEST be overhauled, but the related guidance needs to be updated well before the off-payroll working rules are put in place.
What happens if there’s a disagreement?
As thing currently stand, clients will be expected to mediate appeals made against their own employment status decisions. Clearly, this creates is a conflict of interest. Additionally, dealing with appeals (without an independent body in place) will place another burden on clients’ shoulders.
The CIPD says that, based on previous research, “…dealing with traditional employee disputes thoroughly and fairly demands a significant amount of management time.”
“The process needs to be fair but speedy, and not place cumbersome procedural requirements on client organisations.”
Contractor organisation, IPSE, says a statutory process should be introduced when an employment status determination is appealed: “The client-led dispute resolution service proposed in the consultation document is woefully insufficient and will only serve to heap more burden on business.”
ARC says “Such a process has the ability to create conflict with a temporary worker and interfere with the working relationship. In most circumstances, the client has no need for a specific individual to undertake the work.”
Liability model will cause problems
Currently, HMRC expects agencies at the top of the supply chain to ‘assure the compliance’ of other parties in the chain – if the agency is ultimately responsible for any tax loss. Understandably, this element of the legislation has been widely criticised by respondents.
ARC says any investigations would involve significant cost and extra administration, which couldn’t be covered by indemnity clauses. The proposed liability model would therefore cause a breakdown in trust between parties in the chain.
“The approach taken is therefore disproportionate, burdensome, and achieves nothing other than HMRC’s satisfaction that it would have multiple targets for tax collection, contrary to all basic principles of legality.”
ATT says that agencies may not be aware of all parties in the chain, and that “this approach could lead to confusion as to who within a chain is responsible and liable for any tax loss.”
Additionally, if any tax liability should then be placed at the door on engagers if it cannot be collected from agencies, the accountancy body says: “We would therefore not like to see liability transferred to either clients or agencies except for where they have knowledge of the non-compliance further down the chain and were complicit in it.”
The fundamental problem is that if a client has complied with all of its obligations, the current proposed legislation would mean that they could be faced with a secondary liability even if a correct status determination was made.
The Law Society states: “The greater the distance between the decision-maker and the facts, the more likely it is that misunderstandings occur. Also, the greater the number of parties the more likely the risk of mistakes or information failures moving up or down the supply chain.”
How will the ‘small company exemption’ work?
HMRC has said that ‘small companies’ will be exempt from operating the off-payroll rules in the private sector. A company will meet the definition of ‘small’ if it meets 2 out of 3 criteria:
- Annual Turnover < £10.2m
- Balance Sheet Total < £5.1m
- Number of Employees < 50
ARC says that employee numbers alone should determine whether or not a company meets this definition, as the other measures may involve the release of confidential information. It may also be inappopriate for a recruitment business to ask a client about financial data.
The ATT says that the proposed test criteria are inconsistent, and that it may be better “to base the exclusion test on the extent of an entity’s engagement of off-payroll workers. This might incorporate both a broad test which looks at the overall aggregate payments made to all off-payroll workers, as well as a more focused consideration of the amount paid to any particular off-payroll worker.”
Interestingly, the CIOT suggests that this exclusion should be widened to include small public sector bodies, as well as private sector ones.
Others point out that the proposed exemption is open to abuse.
Many other issues were raised by the dozens of bodies and businesses which have published their responses to the consultation. Some suggestions include.
- HMRC should reinstate the IR35 5% allowance (which is removed for those caught by the off-payroll rules (IPSE)
- Clients should have a statutory obligation to take ‘reasonable care’ when making status determinations. IPSE believes that this would stamp out ‘blanket determinations’, where an entire workforce is placed within IR35, regardless of the true status of contractors working on-site.
- HMRC should provide rulings in cases where an improved CEST cannot deliver an employment status decision (Law Society).
- There are multiple concerns over how information is passed accurately up and down the chain – resulting in a lack of certainty by all parties involved. Businesses are likely to be risk-averse to avoid potential tax liabilities and penalties.
- Many respondents believe that IR35 should be reviewed as part of a wider study of the employed vs. self-employed tax debate, rather than in isolation. This could be done in conjunction with the Good Work Plan.
- Clear guidance (as well as an improved CEST tool) need to be available well in advance of April 2020 (October perhaps). How realistic is this, given that neither has been made available for the public sector over the past two years.
- It is likely that contractors will increase their rates to make up for the extra tax burden they face. These costs will be passed up the supply chain – which will result in companies reducing their reliance on off-payroll staffing. This would achieve HMRC’s obvious desire to reduce the contracting workforce… but would also reduce the amount of tax they expect to raise from this measure.
- April 2020 off-payroll legislation – what happens now?
- What can clients do to prepare in advance of the April 2020 implementation?
- What can contractors do to mitigate against the IR35 changes?