HMRC has published its latest consultation on the forthcoming legislative changes to the rules on off payroll working in the private sector (known as IR35).
The consultation sets out the practicalities of the forthcoming changes.
IR35 compliance is a significant problem for HMRC and one it intends vigorously to challenge over the coming years.
HMRC suggests in the consultation that: "The cost of non-compliance with the off-payroll working rules in the private sector is growing and will reach £1.3 billion a year by 2023/24"
A concession for 'small companies'
HMRC has confirmed that the new rules should not apply to small companies.
They state: "Small organisations in the private sector will not be responsible for determining whether the engagement is within scope of the off-payroll working rules"
Small companies are defined as limited companies that meet at least two of the following three criteria:
An annual turnover of not more than £10.2 million;
A Balance Sheet total of not more than £5.1 million; and/or
Not more than 50 employees.
The government is consulting on how this should be applied to unincorporated entities (such as sole traders or traditional partnerships) and limited liability partnerships.
We assume, although yet to be confirmed, that the requirements for such entities will largely mirror the above.
Did you get the message?
One of the criticisms of the equivalent public sector changes, already in place, is that information and employment status determinations were slow to be passed down the labour supply chain (if at all) to the worker.
In response, the government proposes a new requirement that the client (the end user of the worker) inform the worker of its employment status determination.
As matters stand, the only obligation is for the client to pass the message on to the next entity in the labour supply chain.
Failing to tackle the big issues
Under the new rules, the client is the final (and only) arbiter of employment status for tax purposes (unless and until challenged by HMRC).
One lesson from the public sector experience is that workers have not always been receptive (to say the least) of unilateral client decisions on employment status.
There have, as a result, been numerous calls for a process to be implemented so that workers can challenge the decisions of clients on IR35 decisions.
Rather than introducing a formal process to deal with such disputes, HMRC is proposing to simply leave these matters for the client and worker to fight out between themselves.
HMRC suggests that there is no appetite for a more formal process.
This means that it will be for clients to implement dispute resolution procedures to deal with any disagreements.
These dispute resolution procedures need to be properly constituted and will almost certainly require legal assistance to implement (and possibly operate).
Additional recovery powers
HMRC suggests, innocuously, that its powers of recovery should be extended.
It states: "Where HMRC does not receive the tax due, the government proposes that the liability should initially rest with the party that has failed to fulfil its obligations, until such a time that it did meet those obligations.
"This means that liability would move down the labour supply chain as each party fulfils its obligations […] Where HMRC could not collect from the first party or agency it would ultimately seek payment from the client"
Seeking to justify he extension, HMRC states: "The government believes that extending these existing provisions would provide an effective mechanism for preventing and addressing non-compliance with the rules following the April 2020 reform"
This is a departure from the public sector rules where, in the majority of cases, liability to account for PAYE (where the IR35 rules apply), rests with the contracting entity closest to the PSC.
In long labour supply chains this often (but not always) means the end client has no PAYE responsibility (unless it is the entity closest to the PSC).
While not entirely clear, HMRC's proposals for the private sector seem to be suggesting wider powers of recovery where, for example, someone else in the labour chain has failed to pay or is insolvent.
Such a proposal is likely to be extremely contentious.
The failings of CEST acknowledged?
CEST is HMRC's online tool to help client's determine employment status for tax purposes.
It has been widely criticised as ineffective. In the consultation (whilst defending CEST), HMRC does acknowledge that "there are currently concerns about CEST's ability to […] take account of existing employment status for tax case law".
On account of these concerns, reform is promised.
The final word
A copy of the consultation can be accessed here.
It should be stressed that this is just a consultation on the final rules; it is not the final rules themselves.
The legislation enacting the rule changes is due to be published in the summer and it will only be once that has traversed Parliament that we know the final position.
This consultation has been published now to allow businesses to start preparing. For the purpose of those preparations, businesses should assume that the above are likely to form part of any final legislation.
How can we help?
Businesses are encouraged to undertake a review of their use of contractors and plan for the forthcoming rule change.
Our team of IR35 experts (see above) are ready to assist with that process and answer any questions businesses may have about adapting to the new legislative framework.
You can also register here for our forthcoming round table event discussing these.
The free event is taking place on 2 April 2019 (3:30pm until 5:30pm) at Fieldfisher's London office.
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