On Thursday the 27th February, a report focussing on the implementation of the upcoming private sector off payroll working rules was published, confirming HMRC’s desire to press ahead with the reforms due to their belief that non-compliance with the current IR35 rules is widespread.
There were however some concessions and we have summarised the key changes arising from the review below:
Governments review of private sector off payroll working rules
Commitment to raise awareness of the risks of tax avoidance schemes
Many stakeholders raised concerns that the April 2020* reforms may have the unintended consequence of pushing contractors previously working through their own personal service company into tax avoidance schemes promising a higher take home pay than a compliant umbrella solution.
These schemes present a significant risk not only to the individual contractor but to the whole supply chain. The debt transfer provisions included with the legislation mean that where HMRC are unable to recover the unpaid tax liability from the ‘fee payer’, they will seek to recover it from other parties in the supply chain.
They have stated that they will only seek to use this power when a tax avoidance scheme has entered the supply chain.
Services provided post 6th April – not payments made
The report also repeated the previously announced change that the new rules will apply to services provided from 6th April rather than payments made after 6th April. This change will apply to the private sector only; in the public sector, the new rules will continue to apply to payments made post 6th April 2020.
The report also confirmed the updates to the employment status manual that were made earlier this month, including ‘reasonable care’, transfer of liability, recovery from other persons provisions and outsourced services.
Legislation to compel end-hirers to disclose their size
The April 2020* reforms include a small companies exemption, which means the existing rules remain in place for contractors that are engaged by a small end hirer in the private sector.
The government confirmed that they will introduce legislation in the Finance Bill 2020 which will place a legal obligation on the end hirer to respond to a request for information about their size from a recruitment agency or the worker.
Client led disagreement process
The client led disagreement process introduced with the April 2020* reforms allows the contractor or the deemed employer/ fee payer to make representations to the end hirer where they disagree with the Status Determination Statement.
The report confirms that guidance has been updated to clarify that the end hirer is only required to respond to representations made during the engagement, and before the final payment is made to the contractor.
Both the report and the updated guidance state that should a contractor still disagree with the Status Determination Statement after following the client led disagreement process and believe they have been taxed incorrectly as a result of this, the existing Self-Assessment and National Insurance processes can be followed. How this will work in practice is unclear. We will push to find out about how a contractor can dispute through the self assessment process and confirm our guidance once we have the detail.
Assignments with overseas clients
The report confirmed that wholly overseas organisations with no UK presence will be excluded from the reforms. This means when contracting with an overseas end-hirer, the responsibility for determining the IR35 status of the assignment will remain with the contractor.
Confirmation of the ‘soft landing’
The report confirms the announcement made by the new chancellor Rishi Sunak that there will be a ‘soft landing’ for the first 12 months following the introduction of the reforms.
Alongside the report, HMRC have published a ‘statement of intent’ which outlines their compliance approach to the off payroll working reforms.
The statement confirms that for the 2020/21 year, they will adopt a ‘supportive approach’, confirming that they will not enforce penalties for the first 12 months unless there is evidence of deliberate non-compliance. Any unpaid tax and NI liability will still be owing to HMRC and so there is still a significant cost to the end hirer or fee-payer/deemed employer of getting this wrong.
The report once again confirms that HMRC will not open enquiries into individual PSC’s for previous years if there is a change in IR35 status due to the reforms, unless there is a reason to suspect fraud or criminal behaviour.
With the reforms pressing ahead, businesses need to step up their efforts to ensure they are prepared for 6th April. If you need help with this get in contact with our expert team on 01253 843185 or by filling out the call back form below.
* Update: at the time this article was written, the off-payroll (IR35) reforms were due to be implemented on the 6th April 2020. On the 17th March 2020, the UK government announced that it would be deferring the reforms to the 6th April 2021 to help businesses and individuals during the COVID-19 crisis.