HMRC has opened a 12-week consultation into proposals to extend the IR35 off-payroll working rules to the private sector from April 2020, in a bid to enable individuals and organisations to prepare for the changes, which have attracted considerable controversy since they were announced at Budget 2018
HMRC says the consultation seeks to ensure the proposed processes are suitable for the large and diverse private sector, and that any reforms will also impact engagers in the public sector already applying the rules.
There was an earlier consultation which ran from May to August last year. HRMC says as a result of feedback, the smallest organisations will not have to determine the employment status of the off-payroll workers they engage.
The government intends to use the existing statutory definition within the Companies Act to determine whether or not a corporate client is small.
However, the government recognises that the Companies Act definition does not apply to non-corporate entities and that the balance sheet test in particular may not be suitable for all non-corporate clients. The consultation therefore proposes two options for non-corporate entities which look only at the turnover and the number of employees of the organisation.
The first is to apply the reform to unincorporated entities with 50 or more employees and to entities with turnover exceeding £10.2m. The second is to apply the reform only to unincorporated entities that have both 50 or more employees and turnover in excess of £10.2m.
It also says the reform will not come into effect until 6 April 2020, giving medium and large-sized businesses longer to prepare. In addition, HMRC will continue to work with stakeholders, including tax experts and businesses to explore enhancements to the check employment status for tax (CEST) service and associated guidance, which is used to determine whether or not an individual falls within scope of the rules. Any enhancements to CEST and associated guidance will be available for customers to use before the reform comes into effect.
The April 2020 reform will use the off-payroll working rules in the public sector as a starting point. This means that clients will be required to make a determination of a worker’s employment status and communicate that determination.
However, there will be some changes. For example, there is currently no requirement for the off-payroll worker to be given a determination by a client directly, nor is there any legislative right for the offpayroll worker, or fee-payer to seek the reasons for the determination.
In the consultation, the government considers it necessary to legislate to ensure that the determination – and the reasons for that determination – are cascaded to all parties within the labour supply chain, to ensure they comply with their obligations.
For off-payroll workers, the government considers that this could be achieved by requiring clients to provide the determination – and on request, the reasons for the determination – to the off-payroll worker directly. Changes would be made to legislation and guidance to be clear that the client must provide the off-payroll worker as well as the party they contract with (for example, an agency) the status determination for each engagement.
The consultation considers in some detail the mechanism for cascading this information through the labour supply chain, which it acknowledges will be long and complex in some instances.
In addition, the feepayer which is usually the organisation paying the worker’s personal services company (PSC) will need to make deductions for income tax and NICs and pay any employer NICs. HMRC says that affected organisations should therefore familiarise themselves with the existing legislation at Chapter 10, Part 2 of the Income Tax (Earnings and Pensions) Act (ITEPA) 2003.
As regards non compliance, the existing rules provide for the liability for income tax and NICs to be transferred from one party to another in certain circumstances, for example where a client fails to provide a determination. The government believes that extending these existing provisions would provide an effective mechanism for preventing and addressing non-compliance following the April 2020 reform.
There is also discussion of how to address the absence of a mechanism for individuals to challenge determinations about employment status, and how to tackle concerns that some organisations will adopt a blanket approach, deeming all roles of a certain type fall within the rules.
The consultation says the introduction of a client-led status disagreement process would allow organisations to tailor the process to fit in with their wider business processes, while maintaining a level of consistency across all organisations, and discusses how this approach might work.
As regards the operation of CREST, the consultation acknowledges there are currently concerns about whether the tool has the ability to take account of existing employment status for tax case law and the resulting possibility to not give an accurate employment status determination in some cases, as well as concerns about whether it reflects the complex nature of the private sector.
The consultation also advises how businesses can prepare for reform, and sets out HMRC’s plans to provide education and support for businesses that will be in scope of the changes.
Andy Chamberlain, deputy director of policy at IPSE, the association of independent professionals and the self employed, said: ‘This is an astonishingly myopic move. The UK’s greatest competitive advantage is its flexible labour market.
‘HMRC has claimed pushing these changes into the public sector generated £550m, but this is at the cost of far-reaching long-term damage.
‘In the NHS, TfL and right across the public sector, the changes led to mass contractor walkouts, causing disruption, staff shortages and even the cancellation of major projects.
‘IPSE, the CBI and numerous other business bodies have already warned about the dire risks of the reforms – and we will do so again in this consultation. The government should finally open its ears to the experts and scrap the dangerous reforms to IR35 once and for all.’
A summary of responses will be published later this year. The consultation will inform the draft Finance Bill legislation, which is expected to be published in Summer 2019.
The consultation closes on 28 May.
Report by Pat Sweet