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Don’t rely on the taxman to help with new off-payroll rules

Charlotte Edwards is global employment taxes senior manager and head of IR35 at Anderson Anderson & Brown
Charlotte Edwards is global employment taxes senior manager and head of IR35 at Anderson Anderson & Brown

The long-awaited consultation into off-payroll working rules for the private sector from April 2020 drew to a close on May 28.

There are many questions that remain unanswered.

The following are some FAQs and myths 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 less than 10% of PSCs who should comply with the IR35 legislation currently do so, at a cost of more than £1 billion in unpaid taxes and National Insurance (NI), 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 April 6 2020. Many people have campaigned through the consultation process to have the date extended to 2021 at the earliest.

Others believe the outcome of Brexit will, ultimately, determine whether anything happens.

Key dates to look out for are draft legislation in July and the Autumn Budget.

Is HM Revenue and Customs (HMRC) winning any IR35 cases?

No, but despite several high-profile losses, including the Lorraine Kelly and Kaye Adams cases, it will persevere with the changes.

Because HMRC cannot get it right, it pushes the obligation and liability on to businesses which, by nature, will take a more cautious approach to risk and deem “grey area” cases to be “inside IR35” – effectively doing HMRC’s job.

I have only a small company, so can I ignore this?

The government is proposing to apply the changes to all businesses which are not small under the Companies Act 2006 definition, which is firms with turnover of less than £10.2 million, assets of £5.1m or less and fewer than 50 employees.

But it must be the end-user, ie the client using the PSC’s services, which is small.

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’ NI contributions 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 decided where that hit will be.

If the contractor is to bear the whole burden, then businesses must start negotiating now – they cannot simply deduct these additional costs from the contractor.

What about historical liability?

This has been an area of major concern for PSCs concerned that any “inside IR35” determinations applied from April 2020 will be used by HMRC to open an inquiry into their previous “outside IR35” reporting.

Any historic liability will remain with the PSC, and while HMRC has said the reforms are not retrospective and won’t automatically trigger an inquiry into earlier years, it has not categorically confirmed it won’t use this information to its advantage.

We can’t rely on historical liability not being a factor unless it is written into the legislation.

HMRC will keep us right though won’t it?

HMRC’s “check employment status” tool was 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 make sure they are ready for reforms and have the correct process and procedures in place to ensure compliance, while also remaining competitive in a tough marketplace.

Charlotte Edwards, global employment taxes senior manager and head of IR35 at Anderson Anderson & Brown