Last week, contractors’ eyes were fixed on the government website, anticipating the arrival of the IR35 consultation. HMRC is holding this consultation to gather feedback in order to fine-tune the rules around the introduction of private sector IR35 reform.
* Update: at the time this article was written, the off-payroll (IR35) reforms were due to be implemented on the 6th April 2020. On the 17th March 2020, the UK government announced that it would be deferring the reforms to the 6th April 2021 to help businesses and individuals during the COVID-19 crisis. You can read more about this here.
To recap, from April
20202021, contractors will no longer be able to determine their own IR35 status when working with medium and large companies in the private sector. The end client will be responsible for administering IR35, that will also carry the liability if they are the party paying the contractor. If a recruitment agency is involved in the process as the fee payer, the liability will be passed to them as it is in the public sector.
On the evening before the opening of this consultation, Mel Stride, the Financial Secretary to the Treasury, reiterated that the government believes public sector reform, introduced in 2017 has been successful. He cited the additional £550m raised in income tax and national insurance contributions as proof that the measure has been successful, then claimed that non-compliance in the private sector will cost the UK economy £1.3bn a year by 2023/24. This figure was also referenced in the consultation document, that revealed several other minor adjustments to the rule changes that were introduced in the public sector.
To help you make sense of the IR35 consultation information, we’ve split it up for you below.
Which parties will take responsibility of IR35?
Small companies are not affected by private sector reform; it will only apply to medium and large companies. In the document, HMRC said that the “advantage of this approach is that the majority of companies, as well as tax and accountancy professionals, are likely to already be familiar with this definition and to what extent it applies to their operations.”
As mentioned above, the reform will not apply to small companies. This means that 1.5m small businesses will be exempt from next year’s rule changes. Small businesses are defined as having an annual turnover of no more than £10.2m, a balance sheet totalling no more than £5.1m, and no more than 50 employees. Businesses in small groups, as defined by S.383 Companies Act 2006, will also be considered ‘small’ by HMRC.
This also means that contractors working with clients that fall under HMRC’s definition of ‘small’ will continue to set their own IR35 status.
Any news on blanket determinations?
After the public sector rules were changed, it became apparent that a number of organisations carried out blanket determinations. Many contractors were forced into IR35, irrespective of the fact they might well have belonged outside of the legislation.
This issue was addressed again in the consultation document, stressing that reasonable care must be taken by companies administering IR35. HMRC also insisted that blanket decisions are not compliant. The consultation document went on to explain that the liability is to be transferred from the fee payer to the client, in line with public sector rules.
However, the government views decisions made to a group of off-payroll workers with the same role, terms and contractual conditions as “appropriate in some circumstances.” This concerns some tax specialists, arguing that it increases the chances of mistakes being made.
Will contractors be able to dispute decisions?
Up to now, apparently so. The government has decided upon implementing a “client-led” resolution process for when a contractor disagrees with an IR35 decision. HMRC did not explain the specifics of this process but believes a client should provide reasons for making a status decision. It also went on to mention that workers should have the right to challenge a status decision.
HMRC intends on introducing rules which make sure each party in the contractual chain understands why a decision has been made. In theory, this will make the process more transparent; contractors will have greater clarity over their tax position, and all other parties will better understand their obligations.
Will there be any enhancements made to CEST?
Of course. HMRC plans to collaborate with stakeholders to improve the IR35 tool, CEST (Check for Employment Status for Tax), which critics claim is not capable of contributing to accurate status decisions. In line with this, the government plans to “develop an education and support package for those affected to help them prepare for and implement changes to the off-payroll working rules.”
In the coming months, HMRC has asked for feedback on the IR35 consultation, which closes on 28th May. During this time, experts from the contracting, recruitment and business communities are expected to contribute to the discussion. This in turn, is designed to help the government realise the importance of implementing changes which do the least damage to the UK’s flexible workforce.
Need more help?
At ClearSky, compliance is at the heart of everything we do. If you need guidance on whether your contract is likely to fall inside or outside IR35, our assignment review service will point you in the right direction. We have also created a helpful guide which explains IR35 in further detail.
For more information, contact our team of experts on 0800 464 0372.