BREAKING: IR35 Review – No Delay But Softer Landing

Now we’ve had time to review the full output of the Government’s review into the implementation of Off-Payroll Working Reforms from April 6th 2020.

The Government refused calls for a delay or scrapping it altogether and came up with a series of changes that they believe answer the calls of those affected.

The review outcomes were as follows:

  • HMRC have stated they will not penalise those who get status assessments wrong in the first year unless there is evidence of criminal or fraudulent behaviour.
  • Those without a UK End Client in the chain will continue to apply Chapter 8 of ITEPA (the current rules)
  • HMRC are confirming their previous commitment that information resulting from changes to the rules will not be used to open new investigations into Personal Service Companies for tax years prior to 6 April 2020, unless there is reason to suspect fraud or criminal behaviour
  • A new legal obligation on clients to respond to a request for information about their size from the agency or worker.
  •  Additional communication resources have been published
  • Guidance on identifying tax avoidance schemes has been published.

Looking at the changes that have been made in detail there are some concerns beneath the headlines:

No penalties?

HMRC have headlined the review around this one year ‘softer’ approach to compliance. But what this means in practice is if HMRC disagree with a status in the first year they expect the liabilities to be settled but they won’t impose fines or penalties if the end client has attempted to comply. Is that really any material difference to the current position?

No UK End Client?

The previous draft of the rules stated that even where the end client was overseas but a party in the chain was in the UK the end client should make an assessment – this was flagged as unenforceable from day one so the revision HMRC has made simply accepts the limits of their jurisdiction.

Small Client exemption?

Previously there was something of a contradiction in the legislation – if a medium/large client didn’t issue an SDS they were liable but for a small client the contractor had to apply Chapter 8 of ITEPA as normal. How did the contractor know if they didn’t receive an SDS which route was being followed? This change corrects that but only where the contractor requests the information and it’s unclear how enforceable this is.

More resources?

The publication of guidance around identifying tax avoidance schemes is welcome, of course. But the Government should be doing more to pursue and deal with these schemes – they’re hardly under the radar, I’m approached by one every day trying to convince me that their ‘90% take home pay scheme’ is definitely legit.

There are a few issues that crop up repeatedly which the review does not propose any action around. On blanket assessments it is clear the Government does not support this approach but on the more common problems of blanket banning of PSC’s the reports states:

“The Government is aware that some organisations are considering whether PSCs are the best way to engage contractors who are working like employees. Businesses reported that where individuals had been moved onto payroll, this was a result of a review of the structure of their workforce. However, the Government have not seen any evidence that this indicates an overall change in demand for the services and skills that contractors offer, but will continue to monitor impacts on the labour market. For contractors who would prefer to continue to use a PSC, many organisations will still choose to engage contractors in this way, where this suits their business model. Independent research on the impacts of the reform in the public sector showed that it did not reduce market flexibility or impact use of contingent labour.”

So essentially, HMRC do not believe this to be an issue or an impact of the reform.

No Change to MOO?

It is clear from HMRC’s report that the longstanding issue of Mutuality of Obligation being excluded from CEST remains an issue, “There remain some concerns over whether using CEST would be sufficient to demonstrate ‘reasonable care’ and also about HMRC’s understanding of mutuality of obligation.” But HMRC fail to recognise this through any corrective action.

What is Compliance anyway?

One of the stand out paragraphs of this report remains evidence that HMRC’s assessment as to whether or not compliance with the rules is happening is based around tax receipts. If the goal for compliance is to assess status accurately and fairly it may not result in any changes to tax receipts so how can the Government say “Analysis of the tax receipts following the public sector reform confirmed the Government's view that compliance with the rules is improving. The reform is estimated to have increased overall Exchequer revenues by £250 million in the first 12 months, achieving more than the level estimated at Spring Budget 2017.” Surely this is evidence of non-compliance – more individuals on PAYE than forecast is not evidence of accurate and fair status assessments is it?

Overall I’d say the review has not changed anything significantly and is confirmation that the only way to tackle this is to prepare – engage a partner, make fair assessments and use insurance.

Get in touch

If you want more information on IR35 and what you need to do come April 2020, get in touch as soon as possible.

Jeni Howard

Head of Compliance

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