The IR35 off-payroll working rules which have already been introduced for the public sector are to be extended to the private sector the Chancellor has confirmed in the Budget, saying that the move was ‘essential to ensure fairness between individuals working side by side for the same employer’
In his speech, Philip Hammond said that evidence of non-compliance by those working in the private sector meant it was right that the new rules should be extended. However, in response to representations made during the consultation earlier this year, implementation will be delayed until April 2020 and will only apply to large and medium sized businesses.
Under the reforms, responsibility for operating the off-payroll working rules will move from individuals to the organisation, agency or other third party engaging the worker.
According to HMRC, small organisations will be exempt, minimising administrative burdens for the vast majority of engagers, and HMRC will provide support and guidance to medium and large organisations ahead of implementation.
In its response to the consultation, published at the same time as the Budget, the government said it has learned from the public sector implementation and continues to monitor the impact of the public sector reform.
Tax receipts and independent research suggest that the reform has increased compliance and has not had a widespread impact on public bodies engaging flexible workers where it is in the best interest of both parties to work in this way, HMRC says.
Based on the feedback received, the government will ensure that organisations have sufficient time to prepare for the changes by implementing the reform in April 2020, rather than April 2019. This is in recognition of the need for organisations to set up systems to comply with the reform and review existing contracts.
HMRC’s approach to implementation and education will also reflect the views of stakeholders who called for education for the sector, including provision of guidance which addresses the needs of the diverse private sector market.
Further, the government intends to refine the design of the reform to help businesses to make the correct determination and ensure that they are not incentivised to make the wrong determination. For services provided to small businesses, the responsibility for determining employment status and paying the appropriate tax and NICs will remain with personal service companies (PSCs). Small businesses will not need to consider the employment status or deduct employment taxes from the fees of people they engage in this way.
The government intends to use similar criteria to define small businesses as is found in the Companies Act 2006. As a result, over 95% of businesses will not need to apply the reform, according to HMRC analysis.
The government says it is aware of concerns that businesses may use blanket decisions for the employment status of groups of workers in similar roles without recourse, should those decisions be incorrect, and intends to further explore options for the consequences of businesses failing to use reasonable care in making their decisions.
HMRC will publish detailed guidance and provide support and education to help businesses and taxpayers understand and implement the changes and will also set out what people should do when they do not agree with the business’ decision on their employment status.
The consultation response also makes clear HMRC is looking at where the Check Employment Status for Tax (CEST) tool, along with wider guidance, might be improved, with HMRC acknowledging that there are a number of concerns around the operation of CEST. These include saying more about mutuality of obligation, how to treat multiple contracts and clarifying the language used in places.
The government also states in its response to the IR35 consultation that it is separately considering its response to another consultation on employment status and what long-term changes it might make to reflect changing work patterns and environments.
The response states: ‘However, it is right for the government to tackle the immediate risk to revenue presented by non-compliance with the off-payroll working rules.’
A further consultation on the detailed operation of the extension of the new IR35 rules to the private sector will be published in the coming months. This consultation will inform the draft Finance Bill legislation, which is expected to be published in Summer 2019. The new rules will be given effect from 6 April 2020. HMRC says enhancements to CEST will be introduced in advance of the new rules coming into force.
In addition, the Treasury’s Budget briefing makes clear the reform is not retrospective - as it has in the public sector. HMRC will focus its efforts on ensuring businesses comply with the reform rather than focusing on historic cases.
HMRC will not carry out targeted campaigns into previous years when individuals start paying employment taxes under IR35 for the first time following the reform and businesses’ decisions about whether their workers are within the rules will not automatically trigger an enquiry into earlier years.
IR35 specialist Odos Contractor is urging businesses to prepare well in advance of what it describes as ‘hugely short-sighted' but ‘manageable' changes.
Seb Maley, Qdos Contractor CEO, said: ‘For all of the government's promises to support independent workers, by announcing private sector IR35 reform this administration has shown yet again that it is more focused on squeezing the most amount of tax out of contractors, not necessarily the right amount.
‘There is no evidence to show that public sector changes have worked, while CEST - HMRC's IR35 tool - is incapable is assessing status accurately.
‘On top of this, the taxman's atrocious track record in IR35 court cases demonstrates that HMRC struggles to understand the very legislation it created. For the government to extend reform without addressing these existing issues is irresponsible, albeit not particularly surprising.
‘Given the size of the task ahead, it's vital the businesses and intermediaries engaging contractors ensure they have the skills and expertise to make accurate IR35 assessments on a case by case basis well in advance of April 2020.’
Consultation outcome: off-payroll working in the private sector is here
Budget 2018 Briefing: increasing compliance with the off-payroll working rules in the private sector (IR35) is here
Report by Pat Sweet