Tag: IR35

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Off-payroll: What guidance is available?

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Reforms to off-payroll working (IR35 tests) are coming to the private sector in April 2020. Lucy Webb investigates what guidance is available for accountants and contractors.

Despite the seismic changes that the off-payroll working reforms will bring to contracting in the private sector, HMRC has yet to release any comprehensive guidance on the draft legislation.

The general election should not, in theory, delay the passing of the Finance Bill 2019/20 containing the off-payroll rules for the private sector, so we still anticipating an April 2020 rollout.

In the following article, Lucy Webb examines six pieces of guidance from around the tax, business and contracting world and explains who the guides are tailored towards.

  1. HMRC’s guidance

HMRC’s offering leaves a lot to be desired. While further detailed guidance and an updated Check Employment Status for Tax (CEST) tool are promised to be released later in 2019, for now we have a policy paper, which links to other pieces of guidance available elsewhere on HMRC’s website.

The guidance is very light-touch at times. However, where more detailed information is provided (such as how to identify the size of a client) HMRC’s language is far from clear. When discussing the simplified test it says:

“You must apply the rules from the start of the tax year following the end of the filing period for the second financial year when you met the conditions.”

This may be decipherable to accountants, but other HMRC ‘customers’ could struggle to work out what period is which.Who this guide is for: practitioners who would like a broad overview of the upcoming changes and how CEST can be used to reach a Status Determination Statement (SDS).

IR35 guides for contractors

It is also important that the workers who contract through intermediaries understand what changes are underway. There are a few guides that focus on the contractor-led issues of the IR35 reforms, with some highlights being:

  • The Association of Independent Professionals and the Self Employed (IPSE)

IPSE’s ‘A Guide to IR35’ is a high-level, plain-speaking overview of the IR35 legislation. It provides a few concise examples of the hallmarks of IR35 such as substitution, control and mutuality of obligation, and briefly considers what happens if an engagement is deemed to fall within IR35.

However, IPSE’s guidance is notably light on the public and private sector reforms. On those aspects, it could do with an update as the information is only correct to May 2019, before the draft off-payroll legislation for the private sector was published.

IPSE was initially formed in opposition to the original IR35 proposals, and this stance becomes apparent at certain points in its guide, such as its view of HMRC’s CEST tool.

Who this guide is for: practitioners who want contractor clients to be up to speed with the basics of the IR35 legislation and understand when it may apply.

  • IT Contracting

While this guide is aimed at IT contractors, the information contained is useful for contractors working in other industries as well.

There’s a lot to like about this guide: it’s simple to understand, explains the basic principles of IR35 and also dives into the reforms in enough depth that a contractor should come away with a good understanding of what’s changing and how these changes may impact them.

It also covers questions that contractors are likely to ask eg do I have employment rights if deemed to be a disguised employee, what happens if I have contracts with multiple clients and how will I get paid.

Who this guide is for: contractors that want to understand IR35 in more depth but who don’t want to read the legislation.

Guides for payroll

The following guides have been designed with payroll professionals in mind. While they don’t offer all the answers, they serve as a useful point of reference when understanding how payroll and the IR35 rules will interact under the new regime.

  • CIPHR

CIPHR’s guide offers a solid overview of the private sector off-payroll working reforms from an HR and payroll perspective, with a clear outline of what the IR35 legislation is, why reforms are being introduced, and what changes to expect.

It seeks to answer a few questions more specific to the world of HR, such as: will hiring post-IR35 be a challenge? It also provides an action plan for both the pre-2020 and post-2020 period, with links for further reading.

However, there are some deficiencies to be aware of. For example, the guide comments that “Holiday, sickness absence, parental leave and employer taxes for workers deemed to be employees will be due”. This isn’t technically the case, as HMRC has said that workers that provide services through intermediaries are not entitled to employment rights, such as holiday pay.

Who this guide is for: despite the technical hiccups, this guide is a great resource for HR or payroll professionals who want to understand more about IR35 and how the private sector reforms may impact their day-to-day work.

  • AccountingWEB

Kate Upcraft’s article focuses on the practical payroll aspects of the IR35 reforms that haven’t been covered by HMRC’s guidance to date.

Acknowledging that there are HR, finance, and payroll challenges when dealing with a ‘deemed employee’ contractor, Kate highlights practical steps that payroll professionals should consider, including creating appropriate payroll records, applying the correct tax code, and how to pay deemed employees and PSCs.

Who this guide is for: payroll departments looking to further understand how to apply the new off-payroll working rules.

Lucy Webb

Tax Writer 

Lucy is an ACA and CTA qualified tax writer, who writes about the latest trends in tax and accounting, including IR35 and Making Tax Digital.

https://www.accountingweb.co.uk/tax/hmrc-policy/off-payroll-what-guidance-is-available?utm_medium=email&utm_campaign=AWUKPOW061119&utm_content=AWUKPOW061119+Version+B+CID_bc002ec1c91d5b1fffb3ef0470d4f0ce&utm_source=internal_cm&utm_term=Read%20more

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The revised IR35 rules that apply from 2020/21 will require the engager to issue a status determination statement and allow contractors to challenge it.

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The production of the status determination statement and what happens to it after it is issued plays a pivotal role in deciding who is liable for any IR35 tax and NIC.

What is the SDS?

Under the revised form of IR35, the engager (referred in the law to as the ‘end client’) will decide whether a worker is caught by IR35 or not. However, only engagers who are themselves not ‘small businesses’ will have to do this, as Rebecca Seeley Harris explained in her analysis of the off-payroll working rules.

The engager must notify the worker of its decision about the worker’s status in a status determination statement (SDS). The SDS must explain the reasons for the decision and the engager must take reasonable care in reaching the decision. It is clearly envisaged that the SDS will be a written document.

Buck passing

The IR35 tests are not changing but the party liable for the tax and NIC, should IR35 apply, does change from April 2020 for large engagers.

Unless and until the engager provides an SDS to the worker personally, the engager will always be liable for any IR35 duties. Where, as will often be the case, the engager is contracting with an agency the engager can pass the SDS to the agency, with the result that the agency then becomes the liable party, as long as the requirement to give the SDS to the worker is complied with.

If the agency is contracting with another intermediary the agency can, in turn, pass the SDS to that intermediary, which in turn becomes liable to pay the tax.

The SDS is passed on through the supply chain until it reaches the personal service company (PSC). The buck eventually stops with the last person in the supply chain paying the PSC directly. The SDS can’t pass down to the PSC, so the PSC will no longer be liable for IR35 (unless the PSC has provided any fraudulent document to do with the employment status test).

The person who is liable for the IR35 tax (referred to as the ‘deemed employer’) must deduct PAYE tax and employee’s NIC from the payments they make to the next person in the supply chain as if the worker were on their payroll.

The law also permits anybody in the supply chain to pass on a deduction they have suffered to the next party in the chain. However, employer’s NIC liability, as well as the apprenticeship levy liability, remain with the deemed employer and there is no statutory right to deduct these liabilities, although in practice many deemed employers will probably do so regardless.

Challenging the decision

The new IR35 rules allow either the worker or the deemed employer to challenge the SDS and make representations to the engager who issued the SDS. The engager then has 45 days to either confirm, with reasons, why it upholds the SDS or to withdraw and replace the SDS with a revised decision. The draft law doesn’t say that such representations have to be in writing.

If the engager does not comply, the IR35 tax liability shifts back to the engager. Unlike the pass-the-buck procedure with the SDS, it appears from the current draft law that this liability shift is final and conclusive: it can’t be corrected by complying with the process outside the 45-day window once the deadline is missed.

The clock starts ticking upon receipt of the SDS challenge, which is a problem for agencies in the chain. For example, an agency might believe it is liable for the IR35 tax and thus entitled to make PAYE deductions. But that agency won’t know whether a worker has challenged the SDS issued by the engager, or whether the engager has responded.

CEST issues

In recent cases, HMRC has consistently got IR35 wrong. However, engagers are expected to make an accurate status determination in this notoriously complex field of law.

The revised IR35 rules seem designed to nudge engagers towards using HMRC’s check employment status for tax (CEST) tool.

The CEST tool may provide a reasoned conclusion on IR35 which would satisfy the SDS requirements. However, in many cases, the CEST tool returns an “unable to determine” conclusion. This is not an option open to the engager. An equivocal conclusion is not a valid SDS – the legislation expressly prohibits any sitting on the fence.

However, the CEST tool leans incorrectly towards disguised employment, as it doesn’t take into account the fundamental characteristic of any employment relationship, which is the degree of mutual obligation to offer and accept work (the MOO).

Implications of getting it wrong

Engagers making IR35 decisions that are too harsh or cautious will be incorrectly imposing employer’s NIC and apprenticeship levy liabilities on themselves or others, and therefore will face inevitable commercial problems engaging contractors to do work.

The engager will also have to provide the worker directly with an SDS. It will be interesting to see the response of contractors who are given a document telling them that they are being engaged as a ‘disguised employee’ without any employment rights.

If engagers get things unreasonably wrong the other way, they risk a retrospective IR35 tax liability, as well as penalties for carelessness. The engager may also have missed the opportunity to recover those liabilities from the contractor’s PSC under PAYE, or to pass the liability obligation on to an agency.

Recovery powers

The draft Finance Bill clauses give HMRC the power to make regulations to allow it to recover IR35 debts from anybody who is party to the arrangements. This would encompass the engager, the agency or any other intermediaries in the supply chain, the PSC and the worker. However, the precise circumstances of debt recovery are not yet known.

Preparation is key

All parties in the supply chain will need procedures to ensure that an accurate SDS is made, passed on to the correct parties at the correct time and that any challenges to the SDS are dealt with and communicated properly. All this will need to be carefully documented in the case of any dispute about the tax liability.

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Be prepared for new IR35 rules

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Rebecca Seeley Harris drills into the proposals for off-payroll working (IR35) rules to apply in both the private and public sector from 6 April 2020 and provides tips on how to prepare.

The latest consultation on the off-payroll working rules offers wide-ranging insight into what is to come and also provides some clarification on the existing public sector rules. The consultation refers to the customer or engager of the worker as the “client” throughout, and this is the term that is used in this article.A

The April 2020 reform will use the off-payroll working rules in the public sector as a starting point. The client will be required to make a determination of a worker’s employment status and communicate that determination. If the determination of employment status is “deemed employee”, the fee-payer will need to make deductions for income tax and NICs, and pay any employer NICs.

The small company exception

The reforms will only apply where the client is a medium or large business, or a public body, which means there is an exception for clients who are small businesses. The government has chosen to use the definition of ‘small company’ in the Companies Act 2006, mainly because businesses and accountancy professionals should already be familiar with this definition and to what extent it applies to them.

The Companies Act definition doesn’t include non-corporate entities so, the government is proposing two options:

a)           to apply the reform to unincorporated entities with 50 or more employees and to entities with a turnover exceeding £10.2m.

b)           to apply the reform only to unincorporated entities that have both 50 or more employees and a turnover in excess of £10.2m.

When an organisation becomes or ceases to be “small” in an accounting period, the change relating to the off-payroll rules will apply from the start of the tax year following the end of that accounting period. This is the case regardless of whether the organisation is incorporated or unincorporated.

Practical effect

From 6 April 2020, any client organisation which falls within the rules will be liable for any income tax and Class 1 employee NICs due on deemed payments of employment income until it has fulfilled its obligations. These organisations will also be liable for employer NICs due on those same payments.

It is not clear how an off-payroll worker would know whether the engager should be applying the rules or not or whether, as in the case of the small company exception, the off-payroll worker themselves should be making the determination.

Information sharing

The proposed reforms are designed to ensure the determination of employment status, and the reason for that determination, are cascaded to all parties within the labour supply chain. The consultation document doesn’t comment on whether the client is required to make the determination themselves, or whether the client could outsource the employment status decision and the whole process could be handled by an external team.

For off-payroll workers, the client will be required to provide the determination of employment status and, if requested, the reasoning for the determination, to the worker directly. The legislation will be changed to provide clarity that the client must provide both the contracting party and the off-payroll worker with the determination of status for each engagement.

Under the current public sector rules, the fee-payer is not entitled to see the determination of status, but the government intends to legislate to require all recipients of a determination to pass that information on to the next party in the contractual chain at, or before, they make the first payment.

Long chains

A ‘short circuit’ solution will be available where labour supply chains are long and complex. In this version, the fee-payer would receive the determination of status directly from the client. This would require the client to know who the fee-payer is. As a result of the complexity, the government is seeking views on how the client may be in a position to identify the fee-payer and provide the determination to the party they contract with, the off-payroll worker and the fee-payer directly.

What is clear is that all parties in the labour supply chain will need robust systems to ensure that they can track that the determination of status has been cascaded and received by the next party in the chain. Otherwise, they risk having the liability for tax transferred to them.

Tax liability

In the event that HMRC does not receive the tax due, the government is proposing that the liability should initially rest with the party that has failed to fulfil its obligations. If, however, HMRC was unable to collect the outstanding liability from the defaulting party if, for example, it ceased to exist, the liability should transfer back to the first party or agency in the chain. If HMRC could not collect from them, it would then default back to the client.

The government believes that as the agency is the first supplier of labour to the client, it should be responsible for the behaviour of the chain. The government also believes that the agency has a number of options open to it such as getting an indemnity against non-compliant fee-payers, taking on the fee-payer responsibility themselves or choosing to only work with reputable firms.

Challenging status

Currently, there is no mechanism for challenging a status determination other than the off-payroll worker using the end-of-year processes for overpayment of tax. In addition to the off-payroll worker being entitled to receive the status determination and the reasoning for the determination from the client, the government understands that the off-payroll worker or the fee-payer may disagree with a client’s determination. This might be either because it is believed that the full circumstances have not been considered, or that the client has not taken reasonable care in making the determination.

There are two steps proposed for resolving any status disagreements:

  1. To have the right to seek the status determination directly from the client.
  2. To allow for the status determination to be challenged.

The government plans to introduce a client-led status disagreement process where the client will develop and implement a process to resolve disagreements based on a set of requirements laid out in legislation. This client-led process should also mean fewer off-payroll workers using the end of year processes to reclaim tax, and it is hoped that it will provide a resolution in real time.

No employment rights or benefits

As applies in the public sector, statutory payments and other employment rights will not be affected by the proposed reforms to off-payroll working rules from April 2020. This means that the deemed employment relationship for tax purposes will not result in employment rights or statutory payments obligations for the deemed employer or for the fee-payer.

Be prepared

Organisations affected by the reforms to off-payroll working should take the following actions now to prepare:

  1. Identify and review their current engagements with intermediaries, including PSCs and agencies that supply labour to them.
  2. Review current arrangements for the use of contingent labour, particularly within the organisation functions that are more likely to engage off-payroll workers.
  3. Put in place comprehensive, joined-up processes (assess roles from a procurement, HR, tax and line management perspective) to get consistent decisions about the employment status of the people they engage.
  4. Review internal systems, such as payroll software, process maps, HR and on-boarding policies to see if they need to make any changes.

Written by:

Rebecca Seeley Harris

Employment Status & IR35 expert

PKF Francis Clark LLP

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IR35: Public sector rule roll-out seems inevitable

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HMRC has suggested three ways to improve compliance with IR35 in the private sector, none of which will be easy for contractors or their clients to comply with, writes Rebecca Cave.

Unconscious bias

The consultation is titled: Off-payroll working in the private sector. I feel the term “off-payroll working” implies that the correct tax treatment is to always pay the freelance worker through the payroll, which is certainly not true. Is this a case of unconscious bias by HMRC?

HMRC has also provided an IR35 factsheet which seeks to debunk some of the rumours about the IR35 rules which have applied for public sector contracts since April 2017. One of those “facts” is that its check employment status tool (CEST) has been rigorously tested in conjunction with HMRC lawyers against live and settled cases, and reflects employment status case law.

This is a half-truth at best, as independent checking of CEST by Chartergates legal services and ContractorCalculator has found that the tool does not take account of the test of mutuality of obligation (MOO). This is a vital test of self-employment, as was demonstrated by a recent IR35 win for an IT contractor over HMRC.

Whinge city

HMRC justifies changing the way in which the IR35 rules are applied in the private sector because it is time-consuming and expensive for it to investigate IR35 disputes. This, HMRC claims, is largely because every personal service company (PSC) must be investigated independently.

I have always believed that every taxpayer has the right to be considered individually by HMRC, and is thus required to pay tax based on their own circumstances, not according to some blanket categorisation.

HMRC also whinges that the complex supply chains involving multiple agencies means that it finds it hard to collect information from every organisation involved in the contract, and some of those agencies are not always cooperative.

Finally, HMRC complains that when it does win a case and demands back taxes plus interest and penalties, the PSC simply closes down, and the individual worker starts trading through another company. The consultation omits to explain that HMRC has the power to collect the unpaid PAYE, NIC and penalties from the directors in cases where the PSC is forced into liquidation due to deliberate errors or misstatements provided by the directors.

What’s off the table

The consultation is very clear that the underlying rules for establishing employment status will not be changed, and although the Taylor Review has made some suggestions in this area, those are not taken account of in this consultation.

In addition, the following ideas which have been put forward in the past as potential solutions to the IR35 “problem”, are dismissed as being outside the scope of the consultation:

  • Employment status tied to a minimum length of the engagement – with short-term engagements (not specified how short) never classified as employments.
  • A new structure called freelancer limited company – this was suggested by IPSE in 2014 and considered by the OTS in its small company taxation review in 2016.
  • Client tests the employment status of the worker, and if the relationship is employment pays the employer NIC (as under current public sector rules), but the worker would not be subject to PAYE (contrary to current public sector rules).
  • Client withholds tax from the contractor in a similar fashion to CIS deductions – this is a particularly bad idea, as Howard Royse has argued.

Extending public sector rules

This appears to be the favoured option for HMRC, as it believes the tweaked IR35 rules have worked well so far in the public sector.

Moving responsibility for assessing employment status onto the end client means the client will have to rely on CEST to provide an answer in the majority of cases. The consultation is asking for suggestions on how the public sector IR35 rules should be adjusted to work in the private sector.

David Kirk, an expert on IR35 and employment status, made the following points on the extension of the public sector IR35 rules to private sector contracts:

  • There is a distinct lack of public confidence in CEST, which will continue as long as it produces results visibly at variance with what case law would suggest. The most recent case that HMRC have lost (Jensal Technology) was lost on this issue – and in the public sector too.
  • All parties to the contract will have to rely on HMRC guidance on how to account for the tax payments by the client on behalf of the PSC under PAYE. The current HMRC guidance on the public sector rules appears to contravene both the Companies Act 2006 definition of turnover and the FRS 102 definition of revenue. Correcting these points will require a change in the law, which needs to accompany any other changes to IR35.
  • There is also serious lack of public confidence in HMRC’s policing of IR35, which will not be restored as long as they keep on losing cases in the tax tribunal. So far they have lost two cases out of three this year, six cases out of eight since the new tribunal system arrived in 2009, and 12 out of 24 since IR35 came into being in 2000. A record like this suggests that some of the increased compliance that HMRC has noted in the public sector is likely to have come from incorrect categorisation, resulting from misunderstanding of the legal tests.
  • In the private sector, this poor record will encourage those engaging workers to challenge HMRC aggressively in the courts. Less knowledgeable businesses will simply do what they have done in the public sector, which is to shift non-compliance to offshore umbrella companies that HMRC does not have the resources or the legislation to tackle properly.

Secure labour supply chains

An alternative approach suggested by HMRC is to require businesses to audit their labour supply chains, to ensure that all freelancers are complying with the IR35 rules correctly. There is already HMRC guidance on how to undertake due diligence checking on labour supply chains, and HMRC believe that some of these checks could be adapted to the IR35 rules, for example:

David Kirk commented: “These audit requirements would add a complex layer of bureaucracy and would be very unlikely to work in an environment where non-compliance is endemic.”

Additional record keeping

A third alternative approach is to require engagers to keep more records about the contractors they engage, such as copies of contracts, shift rotas, and line management reporting relating to the engagement. If this information was retained, HMRC would be able to quickly gather what it needs directly from the engager should it later open an enquiry into one or more contractors or PSCs.

David Kirk also believes that this level of record keeping simply would not happen in a business that has no other need to keep the information, and where the people who would need to collate it are far removed from the accounting/ tax function. He commented, “compliance officers will never be able to keep up with this, even assuming that they are themselves aware of the issue in the first place.”

Next stage

This is a stage 1 consultation, and as such it focuses on policy design rather than practical aspects of regulation. The “how to” stage will be fleshed out with draft legislation, likely to be released this Autumn, with a view to passing the law in time for implementation from 6 April 2019.

However, if enough respondents emphasis that a longer lead time is needed in order for businesses to properly prepare, and for systems to be changed and tested, the implementation could be pushed back to 2020.

How to respond

HMRC will be conducting roundtable discussions on the issues raises in this consultation with representative bodies, so if your professional body has not been invited to such a discussion ask them why.

You can respond individually by email to: offpayrollworking.intheprivatesectorconsultation@hmrc.gsi.gov.uk

IR35: Public sector rule roll-out seems inevitable

Written by: Rebecca Cave

Tax Writer
Taxwriter Ltd
DMS Posts

The big IR35 consultation

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HMRC has published its keenly awaited consultation on the future of IR35. Radical changes are ahead for some freelancers and those who hire them. How could you be affected?

Consultation. On 18 May 2018 HMRC published its long-awaited consultation on the future of IR35 (see link below) . This makes clear that the public sector rules which were introduced in April 2017 will be extended to the private sector, but probably with a few minor changes.

Public bodies. The April 2017 changes shifted responsibility to public bodies for deciding if freelance contractors they use are caught by IR35 , rather than it being a question for those doing the work. Faced with fines for getting it wrong, many public bodies have either assumed IR35 applies or changed their working practices by not hiring freelancers.

Fine tuning. Naturally, HMRC is very happy with the 2017 changes and wants to see them rolled out to the private sector. However, there are shortcomings in the public sector model which even HMRC recognises. Therefore, much of the consultation is devoted to asking for suggestions on how it can be improved before being rolled out.

No change. Importantly, the consultation says that the rules for determining if IR35applies won’t be changed. This will still depend on whether the person doing the work would be self-employed if they worked for the client directly, i.e. not through their company or partnership.

When and how? Our guess is that the changes resulting from the consultation won’t take effect until April 2020. But if you want to have your say on how they take shape, you have until 18 August 2018 to submit your comments. Tip. If you use freelancers who work through a company or partnership, use the time before any new rules are implemented to review the contracts and terms of work to ensure that IR35 won’t apply. Loosening the level of control you have over the workers and how they do their job will be key to this.

The question of whether IR35 applies will be shifted from the worker to the hirer as is currently the case for public bodies. This will probably happen in 2020.