What did HMRC Focus on in IR35 Consultation Response?
The release of the draft legislation for IR35 reform in the private sector on 11th July meant that the government response to the IR35 consultation, which was published on the same day, passed under the radar somewhat.
As you might already know, the government held an IR35 consultation from March to May of this year to gather feedback from the parties that will be impacted by private sector changes arriving on 6th April 2020.
Next year’s reform will result in medium and large firms being handed the responsibility for determining the IR35 status of contractors. Much like changes rolled out in the public sector two years ago, the responsibility for determining IR35 status will also be passed from the contractor to the fee-payer, which is typically the client or the recruiter. If the contract is inside IR35, it is the fee payer that must make the PAYE tax and NI deductions and pay them across to HMRC.
Given the concerns that contractors, agencies, private sector clients and many tax experts have with regards to the extension of reform, the government revealed it had received over 200 responses to the consultation, which were taken into account in the draft legislation.
The consultation focused on four issues regarding IR35 reform, which were:
- The specific changes and the definition of small businesses
- Making sure all parties have the information they need to comply with reform
- How HMRC can address non-compliance
- Tackling blanket determinations and allowing contractors and fee-payers to dispute decisions
To save you from pouring through the entire government response (which you can find here) we’ve summarised a number of the key points that could play an important role in ensuring IR35 reform in the private sector is implemented successfully.
Clarity regarding small companies
The draft legislation contains plans to exclude small companies from reform, meaning contractors working with businesses that have a balance sheet total less than £5.1m, a turnover that doesn’t exceed £10.2 or no more than 50 employees will continue determining their own IR35 status from April 2020.
In the government’s consultation response, the tax office explained this in further detail, explaining how it aims to make it simple for companies to recognise whether they fit into the small category. For example, incorporated companies will be asked to apply the Companies Act 2006 definition, while unincorporated businesses will be classed as small as long as their turnover does not exceed £10.2m for one calendar year.
Information sharing to become a requirement
HMRC elaborated on plans to make companies share the factors that determine status with contractors and other parties in the contractual chain. By introducing a ‘status determination statement’ that end-clients must share, HMRC said it will “improve the clarity that the fee-payer and the work have over their tax position.”
In making the end-client the fee-payer (and liable for any unpaid tax) until this information is shared, the government is confident this move will encourage companies to carry out accurate status assessments that everyone involved agrees with.
Action over reasonable care
In the consultation response, the government maintained that blanket determinations, which result in all contactors working for a client being placed inside IR35 regardless of their individual contractual conditions, are not widespread in the public sector. Even so, HMRC still faced calls to penalise any engagers that take this course of action given that it ignores ‘reasonable care’, which must be shown when setting IR35 status.
The government has apparently taken this into consideration, which was reflected in the consultation response and the draft legislation, with both outlining plans to introduce a ‘status disagreement process’, giving contractors the opportunity to dispute unfair decisions with their clients.
CEST to be enhanced
The government also confirmed it is looking to “enhance CEST to ensure it works effectively for organisations affected by the off-payroll working reform.”
But because CEST has been a work in progress since it was released in 2017, that HMRC has promised to improve the tool again might be taken with a pinch of salt. However, it is worth noting that in its consultation response, the government alluded to the fact it has conducted over 25 research sessions on CEST and will also work closely with a wide range of stakeholders to develop the tool. The tax office also said it expects to make the upgraded version of CEST available before IR35 reform next year.
On the whole, the government – albeit ignoring the advice to delay reform – looks to be exploring ways to resolve a number of the key concerns various parties have with regards to next year’s changes.
While this consultation response is digested, yet another consultation has opened to give IR35 stakeholders an opportunity to have their say on the draft legislation. This will run until 5th September. Keep an eye on our blog, as we will be outlining this consultation and what it means for contractors.
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.