Following on from the publication of the draft Finance Bill 2019-20 PayStream have highlighted that one of the key differences from the public sector legislation is the additional responsibility on the end client who now has to:
- Carry out a ‘status determination’ as to whether an assignment falls inside the IR35 rules;
- Communicate the determination down the chain to the MSP or agency it deals with and ultimately to the PSC;
- Retain evidence of how it reached its determination;
- Provide the evidence to the PSC or agency if asked to do so; and
- Deal with any appeal against its decision (within 45 days).
Julian Ball, PayStream’s Legal Director says: “In the public sector end-clients felt that they had insufficient time to prepare their processes to carry out these checks accurately which in some cases led to blanket determinations that everyone was inside IR35. This clearly disadvantaged some contractors who had no statutory right to challenge these decisions. The government has acknowledged that this was not fair hence the introduction of the appeal process and right to information.”
Another key difference is how the legislation deals with non-compliance within the supply chain. The expectation was that HMRC would seek to transfer liability up the chain where it could not recover tax from the party in default. This has been borne out by a far-reaching provision (Section 688AA) enabling HMRC to go after any person who was ‘party to the arrangements’ in which a payment was made in the event that PAYE/NIC cannot be collected from the appropriate entity.
“This is not a huge surprise since one of the main reasons for the introduction of the legislation was HMRC’s historical difficulty in enforcing IR35,” says Julian Ball. “Even when HMRC succeeded in winning a case there was often no money left. What this provision does is to allow HMRC to go after a client where, for example, an agency is insolvent. This will make clients doubly careful about who they deal with.”
There is at least one positive element of the proposed legislation. That is the decision to leave out the requirement for the end-client to operate the new rules if they are ‘small’, a concept defined mainly by the application of the definitions in the Companies Act. The Finance Bill outlines in some detail how the ‘small’ criteria is used for new companies and those transitioning to ‘medium’ or ‘large’ which will be within the scope of the new rules. As is usual with these ‘grey’ areas there are anti-avoidance rules which come into play.
In summary Julian Ball says: “The industry was expecting this and there was nothing completely unexpected. That said a lot of people have held off taking any positive action until the legislation was published. We now expect to see a sharp increase in the demand for IR35 advice from agencies, clients and contractors and of course we are here to help!”
Government risks flexible workforce.
Elsewhere, Robert Salter at leading accounting and tax advisory firm Blick Rothenberg supports the view that the new legislation represents an undermining of the flexible labour market. “At a time when the government has boasted about the UK being ‘open for business’, the new rules, announced in the Finance Bill, risk making it harder for companies to find the skilled staff that they require in a timely and user-friendly manner and are step in the wrong direction.”
Salter conitnued: “ As the legislation is expected to be finalised by November 2019 and the changes introduced in April 2020, companies have only a limited period to start preparing for these changes. As such, whilst some changes may be introduced to the above proposals, it is important for companies to consider the impact of the changes on their “workforce” and understand:
– Which freelancers are likely to be impacted by the change?
– How are staff trained to do the appropriate assessments of contractor status (recognising that CEST, the Revenue tool does not (even per HMRC’s own figures) give a clear answer in ca. 15 per cent of all cases);
– What changes may the company need to make to it’s positioning as an “employer”, to ensure that it has access to the requirements skills and expertise;
– How will it monitor the ‘wider labour supply chain’, if it is using other agencies and companies on a sub-contracted basis.”
What does this mean for contractors?
“Becoming a deemed employee and subject to PAYE and NIC on their earnings, could impact the cash flow of contractors significantly. In addition to the pure costs associated with becoming subject to tax withholdings in the same manner as employees, they will potentially lose the ability to claim some of their wider business costs (e.g. travel costs) as a deduction for tax purposes, whilst still suffering from the potential negatives of being a freelancer – e.g. unpaid holidays and a lack of steady work. In this situation, will more contractors closely consider the option of becoming regular employees?”