As the long-awaited Consultation into the “Off-payroll working rules from April 2020” for the private sector draws to a close on 28th May 2019, there are many questions that remain unanswered.
The following are some FAQs and myths that should help debunk the mystery and allow businesses to start planning their approach to the reforms.
What are the “Off-payroll” reforms?
The changes will see responsibility for determining whether an engagement falls within the ‘IR35’ regime moving from the worker’s Personal Service Company (PSC) to the end-user (including where PSCs are engaged via an agency).
Why are things changing?
“IR35” was originally introduced in 1999 in response to concern over false self-employment and the impact to the Exchequer. The government believes that less than 10% of PSCs who should comply with the IR35 legislation currently do, at a cost of over £1billion in unpaid taxes and National Insurance (NIC) although evidence of this number has been hard to come by.
Public Sector reforms were introduced in April 2017 to help tackle this supposed non-compliance.
When will the private sector changes happen?
The proposed date for the legislative changes is 6th April 2020. Many are campaigning through the Consultation process to have that date extended to 2021 at the earliest, and others believe that the outcome of Brexit will ultimately determine whether anything happens. Key dates to be aware of are draft legislation in July and the November budget.
HMRC aren’t winning any IR35 cases though?
Exactly! Despite several high-profile losses, including the Lorraine Kelly and Kaye Adams cases, HMRC will persevere with the changes because they can’t get it right. It pushes the obligation and liability on to businesses, who by nature will take a more cautious approach to risk and determine those “grey area” cases as “inside IR35”, effectively doing HMRC’s job for them.
I’m a “small company”, can I ignore this?
The government is proposing to apply the changes to businesses who are defined as not small under the Companies Act definition 2006 (turnover of less than £10.2million, assets of £5.1million or less and fewer than 50 employees).
However, it must be the end-user, i.e. the client utilising the PSC’s services which is small, and rest assured there will be a series of anti-avoidance measures implemented to counter any arrangements designed to bypass the legislation.
Will this mean changes to contractor rates?
With new liabilities to be borne across employers NIC and the apprenticeship levy, as well as the income tax and employees NIC being due, there will be an impact to rates and it will need to be determined where that hit lies. If the contractor is to bear the whole burden, then businesses must begin negotiating now – you cannot simply deduct these additional costs from the contractor.
What about Historical Liability?
This has been an area of major concern for PSCs who are concerned that any “inside IR35” determinations applied from April 2020 will be used by HMRC to open an enquiry into their previous “outside IR35” reporting. Any historic liability will remain with the PSC, and whilst HMRC have said the reforms are not retrospective and won’t automatically trigger an enquiry into earlier years, they haven’t categorically confirmed they won’t use this information to their advantage and we can’t rely on this unless it is written into the legislation.
HMRC will keep us right though, won’t they?
HMRC’s check employment status tool (“CEST”) was deemed worthless by a judge in determining IR35 status, and coupled with the fact that some of the public sector guidance remains factually and legislatively incorrect over 2 years after release, alongside HMRC’s recent publication on how to get ready for the changes being less than half a page of A4, it would be a mistake for businesses to believe that HMRC have the answers.
With less than a year to go, business must take action now and seek professional advice to ensure they are ready for reforms and have the correct process and procedures in place to ensure compliance whilst also remaining competitive in a tough marketplace.
What about IR35 and the Construction Industry Scheme?
Due to the temporary nature of projects in the construction industry, many construction companies use a large number of contractors. Those who pay subcontractors to deliver their construction work are already required to register and report under the Construction Industry Scheme “CIS”, which requires them to deduct a sum from their payments to their subcontractors and report on a monthly basis to HMRC. This is then paid over to HMRC as part of the subcontractor’s tax contributions.
The changes to the IR35 rules apply to medium and large sized private sector companies which will mean a large majority of construction companies will be required to apply these rules. Even though companies under CIS are deducting partial contributions towards the contractor’s liabilities, the IR35 reform effective April 2021 means they will need to be increasingly aware of the details of their contractors contracts as well as considering their working practices to determine if IR35 applies or now. Reviews of current contracting arrangements in place must begin immediately, as it is the end-user of the subcontractor’s services responsibility to determine whether their contractors fall inside or outside IR35. Engagements that are deemed inside IR35 and deductions required as a result will take precedence over the CIS rules.
For more information please contact Charlotte Edwards (email@example.com) or your usual AAB contact.
To find out more about Charlotte and the Payroll and Employment Taxes team click here.