Tax expert Charlotte Edwards answers some FAQs about off-payroll working reforms which are due to come into force next year
As the long-awaited HMRC consultation on off-payroll working rules, to be introduced from April 2020 for the private sector, draws to a close next Tuesday, 28 May, there are many questions that remain unanswered.
The following are some FAQs 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 UK Government believes that less than 10 per cent of PSCs which should comply with the IR35 legislation currently do so, at a cost of more than £1 billion 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 6 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 plan to persevere with the changes.
Because HMRC cannot 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 that are defined as not small under the Companies Act definition of 2006 –turnover of less than £10.2 million, assets of £5.1m or less and fewer than 50 employees.
However, it must be the end-user – the client using 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 uneasy that any “inside IR35” determinations applied after 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 while HMRC has stated that the reforms are not retrospective and won’t automatically trigger an enquiry into earlier years, it hasn’t categorically confirmed that it won’t use this information to its advantage, so we cannot rely on it not doing so unless it is written into the legislation.
HMRC will keep us right though?
HMRC’s Check Employment Status Tool has been 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 more than two 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 has the answers.
With less than a year to go, businesses must take action now and seek professional advice to ensure that they are ready for the reforms, and have the correct process and procedures in place to ensure compliance.
Charlotte Edwards is Global Employment Taxes Senior Manager and Head of IR35 at Anderson Anderson & Brown