Businesses need urgent clarity on IR35 private sector off-payroll rules

With six months to go until IR35 off-payroll rules for contractors are extended to the private sector, HMRC is coming under fire over the lack of detailed information about liabilities about employment status

The Association of Taxation Technicians (ATT) is calling for greater clarity around the changes, while a poll of contractors warns of a potential ‘talent drain’ as over half of contractors will jump ship if deemed to have ‘employment status’.

From April 2020, the off-payroll rules which already apply to contractors engaged in the public sector will be rolled out in the private sector. This will shift responsibility for determining whether an engagement falls within IR35 rules from the worker’s personal service company (PSC) to the engager (the business which requires the worker’s services). Where the rules do apply, the responsibility for applying the appropriate tax and National Insurance contributions will fall on the engager or agency which pays the worker’s PSC.

In its submission to HMRC, the ATT has raised concerns about the lack of detail in the relevant draft legislation for Finance Bill 2019-20 published in July.

Michael Steed, co-chair of ATT’s technical steering group, said: ‘Uncertainty in how the off-payroll rules will operate in practice is making it difficult for businesses to make adequate preparations. We encourage HMRC to release more information and detailed guidance as soon as possible.’

The ATT is particularly concerned about the lack of detail as to when an agency or engager can be held liable for unpaid tax and National Insurance because another party in the labour supply chain has failed in their obligations under these rules.

For example, there may be three agencies involved and a failure by agency number three to do what it needs to could leave agency number one or even the engager liable for unpaid taxes even though they themselves have complied with all their obligations.

The association says the details as to when liability could be transferred in this way are very important to the risk analysis and preparations of businesses affected by the off-payroll rules.

Steed said: ‘These changes come in from next April which means that businesses now have only about six months to get ready - and this at a time when many may also be preparing for or responding to the implications of Brexit.

‘There remains much work to be done to ensure that private sector engagers and agencies are both aware of the changes and ready for them.’

HMRC is currently reviewing responses to the consultation on the draft rules, so arguably there is time for an element of clarity of liability to be introduced. The rules are expected to be finalised at the time of the Budget this autumn, with Finance Bill 2019-20 likely to provide a degree of clarity.

Emma Fryer, tax consultant at Croner Taxwise said: ‘‘Tests used to determine if someone is caught by the legislation are determined by case law, we don’t expect this to change and therefore don’t expect a statutory test to be introduced.’

‘It’s expected that when the legislation is finalised it will fundamentally change who makes the decision as to whether a company is caught by the off payroll legislation and who will be liable if this decision is subsequently found to be wrong.

‘Once the legislation is enacted it will put the onus on medium to large businesses to determine the IR35 status of their contractors working through intermediaries. It should be noted that the current draft legislation does not include small businesses so it looks like they may not be affected by the new legislation. 

Lack of contractor awareness

These views have been backed up by a report from specialist law firm Brookson Legal, based on a survey of over 500 skilled contractors. This found 83% have not yet been asked about their status by the business or businesses they are contracting for.

Brookson Legal says contractors’ fears of IR35 are fuelled by a lack of trust that the businesses who hire them will be able to manage their new responsibilities.

Only 3% of contractors believe that the private sector will be ready when the new rules comes into effect in April 2020 and less than a quarter (22%) trust that their hirers will make the right assessment of their IR35 status.

If assessed to be caught inside IR35 and told to pay employment taxes by the businesses that hire them, more than half of the skilled contractors surveyed (59%) said they would consider seeking alternative work with another business. Just under a third (30%) confirmed that they would consider stopping contracting altogether and one in eight would consider retiring (14%) or moving abroad (13%).

Half (50%) also said that they would ask for a pay increase and employee benefits if assessed as being inside IR35, suggesting that companies who wish to retain the talents of the contractors deemed to be ‘disguised employees’ may be faced with increased costs. 

Businesses also face risks from wrongly categorising thousands of genuinely self-employed contractors within IR35. Over a third (37%) of respondents said they would never consider going on-payroll and one in five (21%) would challenge an inside IR35 decision. Over half (53%) believe that the changes will deter people from becoming contractors in future.

Joe Tully, managing director of Brookson Legal, said: ‘Businesses should be making IR35 assessments an urgent priority and ensure they take reasonable care when looking at an individual’s circumstances.

‘Not doing so could cause further complications down the line, including challenges from contractors and falling foul of HMRC. Coming to a fair and just conclusion of a contractor’s IR35 status, on the other hand, allows the business to move on and look at the best next steps for their flexible workforce.

‘Businesses who don’t manage these new responsibilities properly could face a talent drain in April.’

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