IR35 - a post budget update
The inevitable is upon is. In the lead up to the election, Chancellor Javid said he would to review the proposed IR35 rules as part of the Conservative Party’s manifesto. And on 27 February HM Treasury published its report, confirming that the new rules for the private sector will come into force on 6 April 2020. I leave you to decide if there was a real review or not. And nothing seems to have been said in the budget today.
I won’t revisit old ground too much. My comments are already on the news pages of the website http://www.cscorporatesolutions.co.uk/csc/news/budget-genius-ir35-stupidity-and-the-end-of-austerity-or-not/ from October 2018 and at http://www.cscorporatesolutions.co.uk/csc/news/ir35-and-the-future-of-personal-service-companies/ from January 2020. However there have been some “clarifications” on how the new rules are to operate.
View briefly, from April 2020 the public sector rules are extended to medium and large businesses in the private sector. The “end client” is responsible for reviewing the status of each worker operating through an intermediary to decide whether the worker would have been regarded as an employee if they had been engaged directly.
The “end client” is the organisation at the top of the supply chain that is ultimately receiving the worker’s services. The end client must issue a Status Determination Statement (SDS) and the worker has a 45 day right of appeal against the decision made.
As I have said before, the problem with all of that is that many of the end clients don’t want to play. Rather than participate in the IR35 the oil companies in particular will shift the work offshore, or say if you want a job, it is a PAYE one (or nothing).
The “fee payer” is then responsible for then applying the correct tax treatment to payments made to the intermediary. And if the “end client” is not the “fee payer, they must send a copy of the SDS to the organisation they do pay – and so on down the chain to the worker.
The risk, of course, is that unpaid PAYE/NIC can be transferred. HMRC is being given wide scope to transfer any PAYE/NIC debt to potentially anyone involved in the supply of the worker.
Who will be affected?
From 6 April 2020 the new legislation will affect medium and large private sector businesses that engage workers operating through an intermediary.
The report has also clarified that wholly overseas organisations with no presence in the UK will be excluded from having to consider the rules, which was not obvious from the draft legislation.
HMRC has said they will not raise penalties for errors in the first 12 months, except in cases of deliberate non-compliance. But any tax would remain due.
Contractors are concerned that HMRC may start an enquiry into previous tax years as a result of changes being brought on at this stage. For what it’s worth, HMRC says that that information they obtain at this point will not be used to open enquiries into previous years unless there is fraud or criminal behaviour. But lack of resources at HMRC are possibly of more practical importance.
Employment status decisions
For those with decisions to worry about, there are several tests including but not limited to:
- mutuality of obligation: whether there is an obligation for the employer to offer work and for the worker to accept it;
- substitution: whether the worker can provide a substitute worker if they are unable to carry out the work themselves;
- control: how much control does the business have over the way in which the worker carries out their work;
- other factors: e.g. is the worker taking a financial risk when undertaking the work?
And, of course, there is HMRC’s controversial online tool (Check Employment Status for Tax - CEST) to help determine whether a worker should be classed as a deemed employee. The latest version from late 2019 remains unsatisfactory. Mutuality of obligation is not expressly covered. The expectations (a) that work must be offered and (b) that the worker must accept the work are not addressed.
HMRC has said the will accept CEST results, but that is subject to it being used carefully with correct information being input. Where end clients confirm they agree with the output provided by CEST, it can be used as an SDS.
If you want to use your own status tests, you can – but “reasonable care” must be taken in arriving at your conclusion. Whichever route you choose, the decision must be properly documented, and within 45 days the contractor can appeal – so there must be an appeal procedure they can use. HMRC has of course said they will not participate in any such procedures.
The Treasury report brings no comfort. The budget statement gives no relief. There may be further details hidden away in the budget documentation yet to be found. Inevitably - for better or worse, 6th April will arrive and with it the new regime. And with it, those with adverse SDS decisions will find tax and NI being deducted and the amount received will be significantly less than before.
“The Tower trembles; the worlds shudder in their courses. The rose feels a chill, as of winter.” (Stephen King)