Following two consultations, the draft legislation to amend IR35 was released on 11 July. In the second of two articles, Kye Burchmore of RIFT Legal Services looks at how these rules will apply in practice.
How will the IR35 changes work in practice?
The 2019/20 Finance Bill sets out the draft legislation for IR35, whereby medium and large organisations will be responsible for determining whether IR35 applies. The draft legislation proposes amendments to the existing legislation which will also apply to the current rules for the public sector. How these rules will apply in practice is considered in more detail below.
The changes to IR35 in the public sector were brought into effect in 2017 with little warning and little consideration as to how they would operate in practice. One of the common issues encountered has been that individuals are not privy to the client’s decision and the client has no duty to give its reasons or consider the position in detail. The public sector body could simply make its decision and there was little the worker could do about it.
In order to try and alleviate these concerns, a number of new provisions will take effect from April 2020. The client will have an obligation to provide the worker and the fee payer with a Status Determination Statement which will set out whether the contractor is caught by the legislation and the reasons as to why. If the client does not take reasonable care in making this statement, it will not count as a statement and it will be viewed that they haven’t complied with their duties.
The client will be deemed the fee payer and therefore will be liable if it does not provide a Status Determination Statement or does not take reasonable care when undertaking the review.
To ensure the determination reaches the parties, the client has the responsibility of being deemed the fee payer and liable until it passes the status determination to the party it contracts with. This responsibility continues down the contractual chain until it reaches the party paying the limited company contractor. This is unless fraudulent information has been provided to the client, in which case the party providing the fraudulent information will be liable.
To assist companies in making the correct decision, HMRC has said it has listened to concerns about the CEST tool (Check Employment Status for Tax) and will work with stakeholders to enhance it. It will also provide extensive support and guidance to help organisations implement IR35 to ensure they apply them correctly, which will include publicising guidance, providing webinars, workshops and one-to-one sessions with some employers.
If a worker or fee payer does not agree with the outcome the client has reached, they will have a right to dispute this, upon which the client will have 45 days from when the representations were made to either:
- inform the worker that it has been considered and its original conclusion stands, or
- confirm that a different conclusion has been reached and issue a statement that the previous determination is withdrawn.
This approach will be a welcome step forward for many currently working in the public sector who have no such right but there will still be a considerable delay in getting the matter resolved which could mean that the individual has accepted a role that he or she would not otherwise have accepted (and could potentially look for a new contract mid-term) or his or her pay will be significantly reduced until and if the client changes their position.
The alternative option, however, was for HMRC to administer such an appeal process and this would have been a disaster and the government acknowledges that this would not have led to real-time changes in the determinations.
This appeals process is likely to be key for individuals who are deemed to be caught by IR35 because of their contractual terms even though they have plenty of external factors demonstrating that they are outside IR35 (for example, they have their own client base, equipment, website and risks).
As it currently stands, if a contractor deems their contract to be caught by IR35, they are entitled to a 5% allowance which was introduced to reflect the additional cost of administering the deemed payment calculation.
From April 2020, this relief will be removed for work undertaken for medium and large clients where IR35 is applied, as the burden is now with the client and not the contractor.
Transfer liability through supply chains
Where the legislation applies, the PAYE and NIC liabilities are with either the client for not undertaking a status determination with reasonable care or passing it on, or the party paying the limited company contractor where they have failed to operate the deemed payment when IR35 applies.
The government is keen to secure monies owed as well as ensuring companies don’t look at ways of finding anti-avoidance measures. The plan is to also bring in legislation to enable HMRC to move the liabilities up the contractual chain to try and incentivise clients to ensure they only deal with compliant businesses.
HMRC has said that it will provide supporting guidance on what steps clients should take to demonstrate they have taken reasonable care and that transfer provisions will only apply where there is deliberate tax avoidance.
Implementing the legislation
Employment status is very complicated and fact-specific. The general principles of one case can be applied to another but each case will be dependent upon its own individual circumstances, which makes for a grey and sometimes unpredictable area of law. This can be seen from the recent IR35 cases in the media sector whereby different results have been reached for people working in the same sector with one judge commenting: ‘We realise others may not reach this view, as illustrated by the fact that our decision is by one casting vote of the judge’, as per Kickabout Productions Ltd v HMRC .
How are clients supposed to make such an important decision when even the judges find it difficult and sometimes reach different conclusions from one another?
Contractors have, of course, been making these decisions for nearly 20 years and facing the consequences for getting the position wrong but it is easier to make a decision when the result only impacts yourself. For clients, getting the decision wrong could also mean that the client is liable for a large number of contractors, meaning the money at stake would be substantial.
The government has said it has not seen any evidence of blanket decisions and that clients will not be too risk averse, but this is unlikely to be the case. I imagine many finance directors/controllers will be doing some math soon to calculate their potential exposure and once those zeros start adding up, it will be hard to ignore and take a measured approach.
HMRC has publicised very basic guidance on what companies can do to prepare for the changes. It is highly advisable for recruitment agencies, large and medium-sized organisations and contractors to be proactive and start considering the impact of this change to their business. This change has been likely since the government changed the legislation for the public sector in 2017 and so companies have had plenty of time to consider the potential impact.
The saying is that ‘To be forewarned is to be forearmed’ but that only applies if it is acted upon. There is ample time to get procedures and training in place but this will get harder as the legislation approaches.
|Authored by Kye Burchmore, ‘Off-Payroll Tax Handbook’ is due to publish in October 2020. For more information, please visit our website.|