Finance Bill provokes outcry from recruitment industry as IR35 remains on course for April 2020.
Nine months to prepare.
The government has published the Finance Bill in which they confirm they will go ahead with the implementation of IR35 in April 2020. Aside from the obvious negative sentiment around this legislation and its unwelcome presence in the public sector, the manner and detail by which this legislation is being introduced has sent shock waves across the recruitment industry. Not only has the government not listened to what many have said in the consultation, but it seems to have introduced other facets which make the situation worse.
“The government has not taken on our strong recommendation to put its IR35 plans on hold, to conduct a comprehensive impact assessment, and to remove the exemption for small businesses,” said Tom Hadley, REC director of policy and campaigns. “The draft legislation risks damaging the UK’s productivity and labour market flexibility at a time when it is most needed.
“We know from experience that the IR35 rules are a huge problem for employers and contractors alike,” he added. “Making sure everyone pays the right tax is essential, but the rules need to be clear to be effective. The last thing private sector businesses need at this time of Brexit uncertainty is rushed or poorly-designed tax rules that add further uncertainty to an already fragile business landscape.
“The government must urgently reconsider its choices and delay changes to IR35 until at least April 2021,” he concludes.
Julia Kermode, chief executive of FCSA pulled no punches in her response: “I am enraged and shocked to read that they will be introducing a statutory client led status disagreement process which will place significant unfair burden on clients,” she said. “What’s more the policy note states that PSCs will be better off as they will no longer have to manage their own status determinations or incur accountancy fees either. However what they neglect to state is the significant number of PSCs that will be worse off due to being unfairly taxed if their IR35 determination is incorrect, and the fact that any PSC that has a mix of inside and outside IR35 determinations during a financial year is actually more likely to need an accountant to work out their true tax position!
“We know from our lobbying activities that government and policymakers do not understand our sector or fully appreciate the implications of their policy decisions and today’s draft bill confirms this,” she said. “They also state that they don’t expect any significant economic impact as a result of rolling out the new reforms but FCSA has recently conducted research that 13 per cent of PSCs will quit contracting. They claim to have listened to stakeholders concerns but today’s bill simply highlights that they have simply paid lip service to listening. The reforms will be devastating for the UK economy and I would urge our next new Prime Minister to take a sensible look and a sensible view before pressing ahead with these damaging proposals. The UK’s economy is in a delicate state right now and these reforms will do little to alleviate the UK’s problems.”
Adrian Marlowe, chair of the Association of Recruitment Consultancies (ARC), commented “The application date of 6th April 2020 is no surprise despite the rumours that HMRC may delay the launch, but nevertheless contractors, agencies supplying them and hirers alike will no doubt be disappointed that few adjustments have been made to the principles and that it is proceeding much as originally forecast.
“We believe the government is missing a trick in not tidying up the entire IR35 legislation at this stage,” he says. “Instead, with the inclusion of an obligation upon a hirer to give reasons for the outcome of its IR35 assessment, and liability for the tax and NICs if reasons are not given, the rules are now more complicated than ever. We fear the resulting administrative burden and associated risk will inevitably induce blanket decisions.
“At the same time the likely fallout may well offer a golden egg to the alternative model, the umbrella sector not affected by this legislation,” Marlowe says. “Accordingly employment businesses currently supplying contractors may want to consider their position and policies. What services can umbrellas offer that agencies cannot, given that unlike employment businesses that provide work finding services which are regulated and may not charge their agency workers, umbrella businesses do not provide work finding services and do charge their employed contractors?
“If independent company contracting is to be protected, with those willing to take the risks associated with running a business being recognised as deserving better tax breaks, it is imperative that there is an independent review of this legislation before it is implemented. There has not yet been any review by the Treasury Select Committee despite one having been planned based on evidence from ARC when the public sector rules were imposed. Perhaps now is the time for such a review to take place?”
Samantha Hurley, Operations Director at APSCo and Co-Chair of HMRC’s IR35 Forum:
“While the draft legislation is largely in line with our expectations, we at APSCo are extremely disappointed that fee-payers will shoulder the liability of incorrect status determinations – particularly as this is at odds with what was anticipated. It is frustrating that recruiters will, in most cases, continue to bear the brunt of liability in the supply chain whether as the fee payer or the first tier supplier.
“We also believe there should be more clarity around the meaning of a status determination statement. At present, the client ‘complies’ if it provides the decision with reasons to the party contracting with it in the chain and the worker – regardless of whether HMRC ultimately decides the decision was correct – but how much detail should go into this reasoning? Similarly, the legislation states that ‘reasonable care’ should be taken, but there is not yet any certainly around what ‘reasonable’ should look like. In our view, there is still too much room for manoeuvre.”
“We welcome the fact that the criteria which defines entities which are ‘small’ – and so exempt from the changes – has now been more clearly defined. However, there is no statutory obligation on the client to notify the parties in the chain that they are small and commercially this will be problematic.”
Tania Bowers, Legal Counsel at APSCo, added: “The recent case of radio presenter, Paul Hawksbee, who successfully challenged a deemed tax bill of around £140,000 in an IR35 tribunal, is the latest in a long line of stories which indicate that HMRC has little grasp of its own rules. The ambiguity within the latest legislation will do little to ease this sentiment. However, APSCo and its members will, of course, continue to work with clients and contractors to educate them on the changes, and to offer guidance on the many grey areas.”
Dave Chaplin, CEO, ContractorCalculator:
“HMRC has not listened. There is no delay, no rights for ‘deemed employees’, and no appeals process.
Firms are essentially being asked to judge tax crimes before they have been committed and to sentence tax payers before the facts are known, with no way to appeal to a court.
Under the existing chapter 8 IR35 rules contractors decide their IR35 status after the work is done, using the known facts to build the hypothetical contract. There are instances where contractors have gone on site, fully expecting to be outside the IR35 rules, but then circumstances change, moving them inside. E.g. the JLJ services case.
“Under the new rules (Chapter 10), the hiring firm must make an assessment of tax status for someone, before they start work, and before the full facts are known. It’s like trying to judge someone before they commit a crime.
“Worse still, if the hirer decides you are going to be (in the future) within the rules, they then deduct tax from source, and there is no way to appeal the full tax at a later date. This is because the largest portion of the tax they deduct from their costs is Employers National Insurance. Contractors cannot get this back at a tax tribunal, because they never paid it – their “deemed employer” did.
“Taxpayers are being judged before the “tax crime”, and then blocked from getting a fair hearing at tax tribunal.
“It’s why the whole concept falls short of adhering to the principles of natural justice and these legislative proposals by HMRC are a stunning example of them abusing their powers. It’s The Minority Report.”
Mike Butchart, CEO, QAccounting:
“HMRC has drafted this legislation on the basis that public sector changes have increased IR35 compliance, which is something the many contractors who have had their tax status wrongly set by public sector clients will no doubt disagree with.
“The draft legislation itself is very similar to the rules that were enforced in the public sector, reflecting HMRC’s failure to learn from the public sector failings.
“There are, of course, a handful of differences – the most obvious one being the exemption of small companies, which is a measure that will be welcomed by contractors.
“First and foremost, IR35 reform is not the right course of action. However, with the release of the draft legislation, recruitment agencies and medium and large engagers can start putting processes in place to manage reform next year with a degree of certainty.”
Seb Maley, CEO, Qdos:
“HMRC is wrongly under the impression that public sector reform has been a success. Therefore, it’s no surprise that private sector changes look like they will closely mirror those introduced in the public sector in 2017, barring a few small tweaks, such as the ‘status determination statement’, which means clients must respond to a contractor’s dispute in 45 days. Given the liability can transfer to the end-client, this highlights the importance of making well-informed IR35 decisions.
“The onus is now on the private sector to get ready for the arrival of these changes next April. With greater clarity over the incoming rules, private sector firms can at least focus fully on preparing for these changes, ensuring they are capable of accurately setting the tax status of contractors.
“Recruitment agencies, that will often carry the IR35 liability as the fee-payer in the supply chain, must also get to work. To be in a position to continue attracting contractors and protect their own liability, it’s vital they collaborate with end-clients to ensure IR35 status is set accurately.”
Matt Fryer, Group Compliance Director, Brookson Legal:
“HMRC appears to be taking a naïve view that there will be no impact on the wider economy, but this is only on the basis that all hirers assess their contractors correctly by April 2020. Our Ticking Timebomb research sends a warning signal that they won’t – 45 per cent have not yet addressed the issue and 59 per cent are considering taking a blanket approach to all contractors.
“Hundreds of thousands of contractors are worried that this will lead hirers to reduce the number of contractors that they use. Contractors may also leave businesses who do not manage IR35 well. On the plus side, the law change does make hirers accountable to their contractors. Genuine contractors who engage with the businesses that they work for should be able to ensure that they retain their flexible status.
“Our advice to businesses is to act now, and not wait for the Autumn Budget. In doing so firms can avoid making ill-judged, last-minute decisions, like implementing a blanket ban on contractors – a mistake which led to a loss of talent from public sector when the legislation was first introduced in 2000. As we’ve seen recently with TFL and HS2, this could have significant impacts on industries that rely on a highly skilled, flexible workforce, such as construction, engineering and IT.”
Nigel Morris, Employment Tax Director at MHA MacIntyre Hudson:
“The draft finance bill gives some welcome clarity on the definition of “small” for an unincorporated body, namely the turnover limit defined in the Companies Act, currently £10.2 million per annum, as well as specifying that all businesses are “small” in their first year.
“However, this seems inequitable for incorporated businesses who are only classified as small if they meet two of the three criteria relating to Turnover, Assets and Employees. An incorporated business could be caught by the new rules if they have 51 employees, where an unincorporated business wouldn’t, even if it had 100 employees.
“The draft also defines the proposed client-led status disagreement process. If a worker disagrees with a status determination, the client is required to review the decision within 45 days and either change it, or confirm that it is correct and provide the reasons. However it does not go on to say what happens if the worker is still not satisfied. So, it just kicks the can down the road for another 45 days. We would like to see HMRC agree that at this stage they would step in to arbitrate.