Draft Legislation for Further IR35 Reform Published
Last week, as part of the release of the Draft Finance Bill, the government revealed its detailed plans for the private sector reform, in addition to its summary of the IR35 consultation responses.
You might already be aware that from April 2020, IR35 reforms will be introduced in the private sector, resulting in medium and large companies becoming responsible and often liable for setting the IR35 status of the contractors they work with.
For some time, experts have predicted that the rule changes to be introduced on 6th April next year will, in the large part, resemble the ones that were enforced in the public sector two years ago. Following the release of the draft IR35 legislation for incoming changes, this looks like it will largely be the case.
Much like in the public sector, a contractor’s engager – otherwise known as the end-client – will be tasked with assessing tax status. As part of these changes, the liability, which currently lies with the contractor, will be passed over to whichever party is the fee-payer in the labour supply chain.
While, on the face of it, the pending reform takes a very similar shape to public sector changes, HMRC has proposed a few key initiatives, which we’ll explain for you.
Changes will not apply to small companies
If you’re a contractor working with a private sector company considered ‘small’ by HMRC, IR35 reform will not impact you. As is currently the situation in the private sector, you will be able to carry on setting your own IR35 status and will also continue carrying the liability.
Introduction of client-led disagreement process
HMRC plans to include a ‘client led disagreement process’, which is designed to give contractors the chance to challenge what they believe to be inaccurate status decisions. Part of this development includes the need for end-clients to respond to this dispute within 45 days. Should they fail to do this and explain why they made a particular IR35 decision, they will become the fee-payer and therefore liable.
While any moves made to make sure status is assessed fairly will be welcomed, the fact that it looks like the contractor will only have the right to dispute this initially with their end-client has been met with some criticism.
This is because end-clients will very often carry the IR35 liability, meaning they have a financial interest in the outcome of the assessment. As resource website, Contractor Calculator explains, it’s disappointing that HMRC has ignored suggestions that this needs to be handled by an impartial party.
Meanwhile, FCSA has described the introduction of this as ‘unfair’ because it would place a significant burden on the companies that already face the prospect of preparing for incoming reform.
Reasons for IR35 decision to be shared
As expected, the draft legislation states the need for engagers to share their reasons for a particular determination with contractors and agencies. HMRC calls this a ‘status determination statement’ and will introduce it with the aim of increasing transparency with regards to IR35 decisions, leading to accurate determinations.
In HMRC’s guidance, the tax office stated that in extending IR35 reform to the private sector, which it said will impact 170,000 contractors working through personal service companies, independent professionals will not be worse off.
Specifically, in relation to IR35 changes, HMRC said “this measure is not expected to have any significant macro-economic impacts. A behavioural adjustment has been made to account for taxpayers shifting their structure to mitigate tax changes.”
While this is a point many contractors will disagree with, a number of industry experts have said that the arrival of the draft legislation should at least spur on private sector businesses to prepare for the introduction of reform next year.
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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.