- 3rd November 2020
David James shares his opinions on the effect of IR35
There has been a lot of discussion around the impact of the change in Off-Payroll legislation on the UK private sector over the last 18 months, and I have read with interest, some of the comments and foresight on what IR35 is and what it will mean to the UK contracting workforce.
IR35 is the common name given to the Intermediaries Legislation, which came into force in April 2000. It is HMRC’s “test” for self-employment for tax purposes only, pertaining to contractors that are working through their PSC. The legislation is to distinguish the difference between a genuinely self-employed contractor working via their PSC and those who work via their PSC but whose working practices could suggest that they operate more like an employee, who HMRC call a “disguised employee”, and so would fall inside IR35. A genuinely self-employed contractor working outside of IR35 will usually receive gross payments for their services via their PSC, allowing them to pay some of their income in dividends and other methods, which in turn creates a tax benefit. Working via a PSC will also reduce the amount of National Insurance payable. The inside IR35 “disguised employee” should pay broadly the same amount of tax and NI as an equivalent employee would.
What I have found interesting while interacting with many PSCs, clients and IR35 working parties is listening to what side of the fence people sit on in relation to IR35 taxation. It is usually either “the PSC should pay less tax as they have no employment rights for example; no sick pay, maternity/paternity rights, redundancy pay, holiday pay, no notice and no claim for unfair dismissal”, or it is “the PSC is seen as a “tax dodger” that they should all pay the same tax and NI as an employee regardless of no employment rights”. This is a debate that will no doubt always surround the PSC working model.
I understand that the change to Off-Payroll legislation is because HMRC believes they are missing out on a huge amount of taxable income from many PSCs (especially NI contributions), although they do not have a great history of winning IR35 legal cases. To make this extra tax income more accessible and “improve the compliance” around contracting in the UK, HMRC have moved the liability of the PSCs tax status away from the often, single person PSC, and onto the medium and large business, known as the “end-user”, who engages the PSC. The “fee-payer”, usually the recruitment agent, can also be liable depending on if the end-user has proved their “reasonable care” when providing their Status Determination Statements. Small businesses are exempt.
HMRC knows that by getting medium and large businesses involved via a change in legislation, there will be a more stringent approach when assessing the PSCs IR35 status. More “disguised employees” will be identified and changed to a PAYE solution therefore taxation will rise. Ironically, this was how HMRC originally wanted to manage the Intermediaries Legislation from April 2000, but it was dropped after consultation as many businesses raised concern over the administrative burden, the same concerns I have heard over the last 12 months. I believe this is the main reason we have seen blanket decisions from the large UK corporates.
The change in Off-Payroll rules provides a simpler, self-regulated formula for HMRC, which they claim saw an estimated additional £550 million in Income Tax and National Insurance contributions raised in the first 18 months from rolling this legislation out in the public sector. Before the deferral to April 2021, HMRC’s draft Off-Payroll legislation was forecasting an increase in taxation of £3.1 billion from 2020-2024 within the private sector.
One of biggest concerns for end-users prior to legislation change was around the subjective manner of how IR35 is interpreted and implied, and how to complete an assessment that would show all factors of IR35 had been reviewed and adhered to. HMRC introduced their CEST tool in 2017, which HMRC said they would support the result of, if the questions had been correctly answered. Some areas of the public sector are still suffering from this tool, have a look at the NHS Digital problem with CEST. Even the updated version HMRC released in November 2019 has had plenty of criticism, including the fact it does not cover Mutuality of Obligation, which is a key factor of IR35!
The recent House of Lords Economic Affairs Finance Bill Sub-Committee’s report comments that CEST “falls well short of what is required”. So, the end-users who engage PSCs have had to look at other IR35 assessment methods which will prove their “reasonable care” if challenged in a HMRC tribunal on a PSC’s IR35 status determination. You can start to understand why big corporates just rolled out blanket bans on PSCs and wanted to engage PAYE only from April 2020 with this lack of education and support from HMRC on the whole matter, coupled with the fines HMRC could impose on businesses due to incorrect status determinations and the bad publicity. It was just easier to do and mitigate the risk of an investigation. The Government’s review in January 2020 produced some online communication resources and Employment Status Manuals to provide some further guidance.
The businesses that did not impose blanket bans and managed a process of assessing all their current PSCs have had a huge amount of work to do with minimal official guidance to help them. As you can imagine, over recent times there have been plenty of so-called “experts” appearing across social media and the press, claiming to provide all sorts of “help and advice” to businesses through this process, it has to be said that I received some excellent support from Workr Compliance and Dave Chaplin’s team at IR35 Shield during an IR35 programme. Also, during the 9 months leading up to the change in legislation, the UK had a change in Prime Minister, the ongoing daily saga of Brexit, a general election (so a cancelled Autumn Statement) and then a new Government. All of which attributed to a delay of the final legislation on IR35, which we did not see until the Budget on 11th March just 27 days before the original implementation date. Finally, everyone knew what was happening, and all the hard work that put companies in a strong position ready for implementation was worth it.
Then the delay to rolling out the legislation, which has been attributed to Covid-19. Interestingly, this delay was not mentioned in the Budget but a week later on the 17th March. Those opposing the changes in legislation viewed the delay as a minor win, and some claimed that the government could scrap the legislation into the private sector altogether.
For businesses who engage the PSCs, the 12-month deferral has created further confusion over liability and what they should be doing between now and April 2021. There is also confusion from PSCs with regards to keeping their original outside IR35 status, especially where the engaging business assessed them as inside IR35 prior to April 2020. In a nutshell, it is BAU until April 2021. Businesses do not have to determine the IR35 status of their PSCs, as this liability still sits with the PSC until April 2021. My advice to any PSC would be to go and get an assessment to prove your IR35 status, which you should have been doing each year anyway, to guarantee good working practice. The COVID-19 pandemic is affecting most industries and will do for some time. It is therefore important that all companies use this deferral to the Off-Payroll legislation to help with stabilising their business in the current climate but should still be planning ready for the implementation in April 2021.
On Monday 27th April the House of Lords Economic Affairs Finance Bill Sub-Committee’s published their report, “Off-Payroll Working: Treating People Fairly’ and it is quite damning. The first summary paragraph of the report suggests that the IR35 rules “have never worked satisfactorily” and concludes that “this framework is flawed”, this isn’t a great start. The report continues to speak negatively about the government’s IR35 ruling in the public and private sector. Yet more evidence for those who oppose the IR35 reform and claim that it is not fit for purpose.
On 19 May, MP David Davis tabled an amendment to the Finance Bill 2020-2021, proposing a delay in Off-Payroll to April 2023 and failed to gain the votes required by MPs. The Labour party declined to vote and therefore any vote was made redundant.
Now we know the Off-Payroll legislation will be rolled out in the private sector from April 2021, it is important that this time is used wisely to plan and prepare businesses. Companies will need to roll out procedures on PSC engagement, based upon the new world from April 2021, and contractors will need to be assessed to produce a status determination.
Businesses will also need to develop the methodology around the new process of engaging PSCs compliantly. For example, considering the changes the company may need to make to engage PSCs in the new world, including audits, to show any potential HMRC investigation that there is a fully compliant process. Blanket determinations are argued to be in breach of the HMRC’s rules and will do nothing but repel PSCs and their flexible working practice from a business. The available proven resources must be used. By proven, I mean resources who have experience of managing IR35 projects, not the so-called experts who have just read and produced a few LinkedIn articles/videos! To get your business ready to use PSCs compliantly from April 2021, do not panic or leave it all until 2021 and go for the blanket approach.