With weeks to go until the IR35 rules come into force, the government has released the findings of its off-payroll review, with no backtracking on initial plans
The review was launched by former chancellor Sajid Javid in January but focused only on implementation issues despite calls to defer the introduction by a year.
A few minor changes, which had already been announced, are clarified in the document, and revised draft legislation will be issued to reflect the exclusion of offshore companies without a UK presence from the off-payroll rules.
The updated draft legislation will be included in Finance Bill 2019-20 and will be published on 19 March, a Treasury source confirmed.
The off-payroll rules for the private sector will go ahead as planned on 6 April 2020.
The government’s only significant concession is to introduce a soft landing period for penalties for the first year of operation, which had already been announced earlier this week. This means that fines will not be issued unless HMRC suspects tax evasion or abuse of the system.
HMRC will also keep the dedicated IR35 project team in place to help with enquiries and maintain a communication programme with affected large and medium-sized businesses.
The government has also committed to not operating the rules retrospectively, with ongoing contracts deemed to fall under the rules from 6 April 2020, regardless of when they started.
HMRC also confirmed that ‘information resulting from changes to the rules will not be used to open new investigations into personal service companies for tax years prior to 6 April 2020, unless there is reason to suspect fraud or criminal behaviour’.
There will also be a new legal obligation on client companies to respond to a request for information about their size from the agency or worker.
One contractor told Accountancy Daily: ‘A 12-month soft landing is better than nothing but this still doesn't go far enough.'
The government claims that the off-payroll clampdown will raise an additional £1.3bn a year in taxes which it says are avoided due to worker status and use of personal service companies.
Susan Ball, employer solutions partner at RSM said: ‘There has been some vigorous lobbying in favour of postponing the IR35 reforms, but this review makes it explicitly clear that these will be introduced as planned on 6 April 2020.
‘There will also be a new legal obligation on contracting organisations to respond to a request for information about their size from an agency or worker.
'This might be useful to help every party to understand their position, but it is unhelpful to have new obligations introduced at the 11th hour.
'There will also be updates to the legislation to address confusion about how the rules apply to offshore companies.’
On the exemption for offshore companies, Brian Palmer, AAT tax policy adviser, said: ‘The issue with overseas organisations had the potential to create significant complexity and bureaucracy so the clarification that they will be exempt is welcome.’
The 23-page Treasury review, which reiterates the original plans, also stated that ‘HMRC are also undertaking a comprehensive programme of customer education and support including one-to-one support for the largest businesses, direct letters to over 40,000 medium sized businesses, and webinars and workshops’.
HMRC will raise awareness of the risks of using avoidance schemes and arrangements with individuals, end-clients, employment agencies and intermediaries. A self-help guide has been published for contractors and agency workers on how to avoid entering into noncompliant arrangements.
The government has promised to conduct a review of the implementation of the rules six months after the start date of 6 April 2020.
The review document stated that HMRC will ‘commission external research into the impacts of the reform six months after implementation, including on how status assessments are being made’.
Jeremy Coker, president of the ATT, said: ‘The planned research needs to be wide ranging and involve not just clients (the businesses which requires workers’ services) but also agencies and workers.
‘The previous research commissioned in 2017 focused on the impact on public sector bodies in their capacity as clients rather than on the impact on supply-chain agents, personal service companies or workers who were also affected by the change.’
While Coker welcomed the initial review, he said that a more detailed research project was vital to effectively evaluate the new IR35 environment.
‘That early research will be an important step in identifying issues as promptly as possible but the full impact of the new rules is unlikely to become clear until after the affected workers have submitted their 2020/21 tax returns.
‘A deeper and wider review in the first half of 2022 would give a better picture as to whether the new rules have achieved their goals.’
Financial secretary to the Treasury Jesse Norman said: ‘It is only right that the off-payroll rules are applied consistently across all sectors. Two people sitting side by side doing the same work for the same employer should be taxed in the same way.
‘Following a review the government is announcing a package of measures to help individuals and businesses implement these changes smoothly.’
Treasury Off-payroll review document, issued 27 Feb 2020
Read our detailed IR35 coverage here
By Sara White