HMRC clarifies IR35 rules for off-payroll workers

With six months to go until the IR35 rules for off-payroll workers in the private sector come into force, HMRC has set out its approach to the operation and enforcement of the new regulations

HMRC said it will only apply the rules retrospectively in cases of suspected fraud or criminal behaviour.

The off-payroll rules (IR35) are going to be extended across the private sector from April 2020, bringing larger companies under the regulatory framework, currently only mandatory in the public sector.

Under changes which already apply to the public sector, responsibility for deciding the employment status of a contractor who supplies their services via a personal services company (PSC) will shift from the individual to the organisation hiring them, with effect from 6 April 2020.

In a briefing note issued this week, HMRC says it has taken the decision that it will only use information resulting from these changes to open a new enquiry into earlier years if there is reason to suspect fraud or criminal behaviour.

The Association of Taxation Technicians (ATT) has welcomed the move, pointing out that the off-payroll rules are complex to apply and many contractors are concerned that if their engager reaches a different conclusion from them – or simply makes a blanket decision that all its contractors are within the off-payroll rules to reduce their own tax risk - HMRC might use the change in reported status as a reason to enquire into the contractor’s tax affairs from previous years.

Jon Stride, co-chair of the ATT’s technical steering group, said: ‘This is a high bar to clear and is a welcome pragmatic approach by HMRC. It also builds on earlier statements that the reforms are not intended to be retrospective.’

However, Susan Ball, employment solutions tax partner at RSM, sounded a note of caution. ‘The statement is slightly ambiguous and is not entirely clear on what this would mean in practice when people perhaps previously haven't applied the rules correctly,' she said.

Check employment status for tax (CEST)

Ball is more positive about HMRC’s announcement it will launch an enhanced version of the check employment status for tax (CEST) tool before the end of the year.

First introduced in 2017 to help individuals and organisations decide if a worker should be treated as employed for tax purposes, CEST  takes users through a serious of step-by-step questions.

There has been considerable controversy about its operation, but HMRC says the tool was rigorously tested against case law and settled cases by officials and external experts.

The briefing note states: ‘It provides accurate results and HMRC will stand by the result produced by the tool provided the information input is accurate and the tool is used in accordance with our guidance.’

To date, CEST has provided a determination in at least 85% of uses. However, HMRC concedes that as a minority of employment cases can be less straightforward, those individuals will be given detailed help and guidance, including one-to-one support from specialist advisers.

HMRC says it has worked with more than 300 stakeholders to make the forthcoming release of the tool clearer, reduce user error and consider more detailed information.

However, contractors should not wait for the enhancement, with HMRC saying it stands by the results given by the tool now, provided the information entered is accurate and it is used in accordance with our guidance.

Ball said: ‘We look forward to the launch of the new CEST tool before the end of this year, which should help reduce the confusion and errors that we have seen in employment status determinations to date. It is pleasing that HMRC have confirmed that if you use the current version they will stand by the decision if it is completed correctly.’

Contractor confusion

HMRC estimates that, outside of the public sector, only one in 10 people who should be paying tax under the current off-payroll working rules are doing so correctly.  Its estimates indicate the IR35 reforms will raise an additional £3bn in tax over the next four years.

Research by management consultancy Procorre, which surveyed over 500 contractors to measure how ready they are for the April 2020 changes, has found that many could unknowingly be working with clients in ways that are not compliant with their independent status.

Nearly a quarter of those surveyed (24%) work solely on site for their client, while 70% said if they suddenly became unavailable, they would not be able to provide an alternate through their PSC. While 65% said they don’t need approval for time off, over half (53%) confirmed their client picks the days, hours and locations they work, despite their contractor status. Furthermore 52% said they use IT equipment provided by their client. While they cited cyber-security concerns as the reason, Procorre says this is still a red flag for independent workers.

When it comes to the scope and nature of contractors’ activities, 57% work on a sole client contract at any one time, while 10% said they hold management duties over employed staff. Smaller things like using a client’s email address domain, which nearly three quarters of those surveyed do (72%) can also undermine contractor status.

Anne O’Donnell, CEO of Procorre, said: ‘While many contractors fear a repeat of the public sector reforms in 2017, by taking a proactive, positive approach and working with existing and potential clients to understand any impact ahead of April 2020, contractors will still have plenty of opportunity post the changes.

‘We are working with our contractors and clients in the private sector to ensure that the due diligence and process is in place for a smooth transition and I’d encourage others in the industry to do the same. The contracting industry and the flexible workforce it’s made up of is still a major contributor to the economy, so we’re hopeful that any changes will be applied fairly.’

HMRC issue briefing: reform of off-payroll working rules

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