banner

Autumn Budget 2017: IR35 private sector rollout – consultation announced

Category: IR35

Autumn Budget 2017: IR35 private sector rollout – consultation announced

The changes to IR35 currently plaguing the public sector look set to be extended into the private sector, after the Chancellor announced a consultation into off-payroll working in the private sector in the Autumn Budget.

Introduced into the public sector in April 2017, the reforms have caused unprecedented damage. With many contractors preferring to seek opportunities elsewhere rather than risk being incorrectly classed as ‘inside IR35’, public sector bodies have been starved of critical skills.

The fallout has led to delayed and cancelled projects, and the deterioration of public services such as the NHS. With the proposed private sector rollout, the Government threatens to further hamper flexible working in the UK, causing damage to UK plc on a far grander scale.

From the Budget document:

3.7 Off-payroll working in the private sector – The government reformed the off-payroll working rules (known as IR35) for engagements in the public sector in April 2017. Early indications are that public sector compliance is increasing as a result, and therefore a possible next step would be to extend the reforms to the private sector, to ensure individuals who effectively work as employees are taxed as employees even if they choose to structure their work through a company. It is right that the government take account of the needs of businesses and individuals who would implement any change. Therefore the government will carefully consult on how to tackle non-compliance in the private sector, drawing on the experience of the public sector reforms, including through external research already commissioned by the government and due to be published in 2018.

What are the IR35 reforms?

Traditionally it has been the contractor’s responsibility to evaluate their IR35 status for each contract and deduct tax accordingly. However, the reforms – already in effect in the public sector – require end clients to carry out an IR35 assessment for each contractor they engage.

If the contractor is supplied via a recruitment agency, the agency is responsible for deducting tax via Pay As You Earn (PAYE) if the contractor is judged to be caught by IR35. If the client engages the contractor directly, the client is required to make the tax deductions.

The tax liability risk also shifts further up the supply chain. If HMRC investigates and finds that a contractor has been paying tax as ‘outside IR35’ where it believes they are caught, the agency can be targeted for backdated tax, penalties and interest. This is unless it can be proven that the client hasn’t taken ‘reasonable care’ when assessing the contractor’s status, in which case they then become liable.

This creates a huge incentive for clients and agencies to assess contractors as caught by IR35, which contractors are well aware of. Extending these rules could mean many contractors will struggle to ever secure a fair IR35 assessment.

IR35 reforms – what contractors must do now!

The Government may have announced a consultation into the proposed changes, but if the public sector changes are anything to go by, the recommendations already look predetermined. Nonetheless, there is plenty that you can be doing to help protect the livelihood of flexible working in the UK.

IPSE WARNS OF “NIGHTMARE” PRIVATE SECTOR IR35 SCENARIO

The Association of Independent Professionals and the Self Employed (IPSE) has intensified its opposition to a planned government rollout of “disastrous” new public sector IR35 rules to the private sector by detailing major shortcomings in HMRC’s online employment status tool. The flaws, IPSE argues, effectively vitiate the instrument.

IPSE’s Director of Policy and External Affairs Andy Chamberlain explains why the Revenue’s Check Employment Status for Tax (CEST) tool is unfit for purposes. His criticisms are shared by many other organisations including the Association of Professional Staffing Companies (APSCo) and the Freelancer and Contractor Services Association (FCSA) — an umbrella company trade association.

There are many reasons for the pervasive lack of faith in the tool, including:

-The rules are too complex to be captured by a simple online tool. The interpretation of IR35 requires a deep familiarity with case law as well as informed, human interpretation of each contract. As Chamberlain puts it: “Any online tool will lack the nuance required to get it right in every instance”.

-HMRC concedes that the tool fails to make determinations in 15% of cases, which it considers an acceptable hit rate. However, for the 15% affected it is of no use whatsoever. These are almost certainly borderline cases much in need of guidance, Chamberlain observes, meaning that the tool “fails to those who need it most”.

-The tool omits any test for Mutuality of Obligation (MOO), which is a central determinant in case law as to whether IR35 applies to a contract. HMRC recently revealed that it omitted this test as obligations are part of all contracts. But for contracting professionals, the degree of MOO is crucial: employees are far more obliged to perform tasks for employers than contractors are for clients. The omission of this test is a critical flaw.

-The person applying the CEST tool may have a biased or inaccurate view about the nature of the engagement. Believing that certain conditions apply doesn’t make that true — some managers mistakenly think that they have control over how the work is done, but the contract’s details may demonstrate that this is entirely inaccurate. There are no means of challenging how the tool has been completed so, inevitably, determinations are reached based on contentious or simply wrong answers.

Chamberlain writes: “The problem will be multiplied many times over if all private sector clients are forced to make IR35 determinations for each of their engagements. As IPSE has long argued, IR35 is a complete nightmare to wrestle with.”

IPSE is urging all contracting professionals and others concerned about the proposed rollout to write to their MPs. A sample letter is available here.

Autumn Budget: IR35 in private sector more ‘foolhardy’ than ‘fair’

The extension of IR35 regulation has quickly become a topic no business relying on a contract workforce can ignore

Financial secretary to the Treasury Mel Stride was quoted saying that extending IR35 regulation of contract workers from the public to the private sector was “a matter of fairness”, and that there had been “no evidence of significant impact on attrition rates of contractors working in the public sector”.

This has put the market on alert that the government will be applying the controversial changes to private sector businesses far sooner than many had hoped, and seemingly in complete disregard for the serious and ongoing impact it is having in the public sector.

The reaction from organisations close to the situation has been strong and largely uniform. The Association of Professional Staffing Companies (APSCo) predicted the move “will have a devastating impact on the flexible labour market”. The Association of Independent Professionals and the Self Employed (IPSE) has described HMRC as “in denial about the fallout from the public sector reforms”.

As a business that places hundreds of contractors with both public and private companies every year, we’ve been actively advising businesses about what to expect and how to react to the changes.

Expect higher contractor costs…

When the regulation was first applied we saw a widespread movement of contractors from public sector contracts to avoid the burdensome regulation. This ‘boom’ in available contractors may soon turn to ‘bust’, as the increased burden on clients and candidates evens out across markets. Businesses must plan for an increase in contractor rates, particularly from areas where the workers are highly-skilled and business-critical.

…and shorter contract lengths

IR35 puts additional burden on contractors to prove that they are ‘genuinely’ self-employed and not beholden to one employer. This will apply pressure on contractors to seek shorter contract times so they can engage with multiple clients. For major projects this will require businesses to consider alternative resourcing, and will potentially increase the onboarding of permanent staff.

Status questions are coming

One of the most perplexing challenges set by IR35 is making it the hiring business’s responsibility to determine the tax status of its specialist skilled workers. Beyond having to hire or train in the skills to make such an assessment, companies can reasonably expect that their contractors may not always agree with the status they are given – which may cause frustration and delays.

The ambition for an effective consultation on IR35 is to encourage the creation of a more effective and easier to apply set of ‘tax statuses’; placing greater burden for clarity and categorisation on HMRC where it rightly belongs.

Get more consultancy from your recruitment consultants

As these changes come in it’s understandable that businesses will be looking to their recruitment partners for answers, solutions and support. IR35 is bringing significant new challenges to recruitment companies as well, and will fundamentally alter how they can provide candidates and manage their contracts. IR35 adds the need for recruitment companies to administer tax deductions on behalf of HMRC, and provide reports on the earnings and company details of self-employed workers.

The pressures this will add to recruitment companies will have a significant impact on the business and operating models of many. The age of ‘pile them high’ placement is quickly coming to an end, creating the environment for experienced, innovative and consultancy-focused recruitment to return.

Much of the above is based on a ‘worst case’ scenario where the lessons of IR35’s painful implementation in the public sector go unlearned. However, there remains reason to be hopeful. We, along with a number of our peers and leading industry bodies, will remain active in petitioning HMRC and the Treasury to accept consultation and advice from those who are closest to the impacts of this regulation. We are also encouraging our clients to join our calls for a better, more effective set of rules.

A healthy, thriving, flexible workforce is essential to the UK. It’s imperative for all organisations to become aware of IR35, and take an active role in ensuring business is not robbed of the skills, flexibility and power of a thriving contractor environment.

Taylor Review suggests protection for ‘Dependent Contractors’

The independent Taylor review into modern employment practices has highlighted seven principles to achieve ‘good quality work for all’.

Matthew Taylor, who was commissioned last year by the Prime Minister to carry out this review called for a fresh look to be taken at employment laws to make it easier for workers to understand and access their rights.

Among its key recommendations is that there should be protection for those working through the ‘platform based model, such as Uber. It renames these ‘workers’ as ‘Dependent Contractors’, and flags up that it should be clear how they are distinguished from ‘legitimately self-employed’.

The seven principles are:

1. A national strategy for work should be explicitly directed toward the goal of ‘good work for all’. It is something for which Government needs to be held accountable, but for which everyone needs to take responsibility. It says: “The same basic principles should apply to all forms of employment in the British economy – there should be a fair balance of rights and responsibilities, everyone should have a baseline of protection and there should be routes to enable progression at work. Over the long term, in the interests of innovation,fair competition and sound public finances we need to make the taxation of labour more consistent across employment forms while at the same time improving the rights and entitlements of self-employed people.”

2. Platform-based working (a business model which provides exchanges between two or more groups, usually consumers and producers), offers opportunities for genuine two way flexibility and can be beneficial for those who may not be able to work in more conventional ways (companies Uber operate like this). It says: “These should be protected while ensuring fairness for those who work through these platforms and those who compete with them. Worker (or ‘Dependent Contractor’ as the Taylor review suggests renaming it) status should be maintained but we should be clearer about how to distinguish workers from those who are legitimately self-employed.

3. The law, and the way it is promoted and enforced, should help firms make the right choices and individuals to know and exercise their rights. The ’employment wedge’ (the additional, largely non-wage costs associated with taking on an employee) is already high and increasing it further should be avoided. It says: “Dependent contractors are the group most likely to suffer from unfair, one sided flexibility and therefore there should be additional protections for this group and stronger incentives for firms to treat them fairly.”

4. The best way to achieve better work is not national regulation but responsible corporate governance, good management and strong employment relations within an organisation, which is why it is important that companies are seen to take good work seriously and are open about their practices and that all workers are able to be engaged and heard.

5. It is vital to individuals and the health of our economy that everyone feels they have realistically attainable ways to strengthen their future work prospects and that they can record and enhance the capabilities developed in formal and informal learning and in on-the-job and off-the-job activities.

6. The shape and content of work and individual health and well-being are strongly related. For the benefit of firms, workers and the public interest ‘we need to develop a more proactive approach to workplace health’.

7. The National Living Wage needs to be accompanied by sectoral strategies engaging employers, employees and stakeholders to ensure that people – particularly in low-paid sectors – are not stuck at the living wage minimum or facing insecurity but can progress in their current and future work.

The Government will now be engaging with stakeholders across the country, including those who represent employers and employees, to understand their views ahead of publishing a full Government response later in the year.

IR35 Reforms Blamed for Public Sector Decline

Two large IT recruiters have blamed IR35 reform in the public sector for taking the shine off their performances in the last six months.

Parity Group, an AIM-listed agency hiring for state bodies, and Hays, a FTSE-listed firm with public clients like TfL, each cite the off-payroll rules in trading updates up to June 30th.

Hays, which reported first, said its temp business was “negatively impacted” by factors including “uncertainties created by the recent implementations of the IR35 regulations.”

‘Uncertainties’

These IR35-induced uncertainties, the firm explained, served to drag its public sector gross profits down 17%, on top of a nine per cent drop in temp recruitment fees as a whole.

A few days later in its update, Parity said its staffing unit had turned over “slightly lower” revenues in 2017’s first half than a year ago, due to “lower public sector contractor volumes.”

The dip in the number of contractors was not specified by the group, but it was blamed — at least in part — on the “transition required to deal with the IR35 taxation reforms.”

‘Familiar story’

With two recruiters in about as many days each pointing an accusing finger at the April framework, “a familiar story” is unfolding, say IT analysts TechMarketView.

Yet Parity hinted that an end is in sight, as its affected unit (‘Professionals) “appears to have weathered the [IR35 reform] process more favourably than some other staffing businesses”.

Alan Rommel, group chief executive said: “Hays [is] a recent example but others [too] have declared unfortunate drops.”

The Parity CEO also said that, despite the IR35 reform’s initially downward impact on contractor volumes, “client demand has been restored post-implementation.”

“Client demand is high both public and private, and both contract and perm — we are working hard to replace churn on contract,” he said. “Demand is there.”

‘Tight ships’

No restoration in demand was noted by Hays, which told Bloomberg in a video interview that all its UK clients were exercising “very tight cost control.”

This financial restraint seems to add to the growing list of pressures that a growing list of contract IT staffing agencies seem to be facing.

“Hays, this month cited a tough public sector market and also pointed to IR35 issues,” TechMarketView said. “And [another recruiter] PageGroup pointed to Brexit, political uncertainty and a late Easter for its poor UK performance.”

New Dynamo App – Download today for free

The worlds of business and accounting are already digital, and with HMRC’s Making Tax Digital (MTD) programme, doing nothing is no longer an option.

With a myriad of accountancy and business software, cloud packages, Apps and portals – digital has become confusing.

To keep things simple, and make your life easier, we have developed a market leading app that brings everything together in one convenient and centralised place.

Our free app will become your go-to resource in an always-on, mobile world – the principal information point for everything connected with your accounts, finance, tax and business.

From links to Freeagent to Calculators, we put the tools you need right in your hand. Plus, a host of valuable tax and business calculators and essential information, right there, always up to date, when it’s needed.

Dynamo have risen to the current digital challenge, bringing our world of experience to your pocket.

Our team is always on hand to provide professional, personal advice and guidance.

Download our free app today:

android apple

dynamo QR code

NHS U-turns on blanket IR35 tax crackdown

Anything to do with mass contractor walkouts?

The NHS has repealed its blanket decision to shove contractors inside the IR35 tax clampdown by default.

Last month the government shifted responsibility for compliance with the IR35 legislation from the individual contractor to the public body or recruitment agency. The Treasury says it hopes to raise £185m for 2017/18 by bringing public sector contractors within the scope of the legislation.

In an update [PDF] NHS Improvement, which is responsible for overseeing foundation trusts, said it had previously “anticipated that providers would need to ensure that all locum, agency and bank staff were subject to PAYE and on payroll for the new financial year”.

However, it has admitted that blanket IR35 determinations were “not accurate” and now plans to carry out those decisions on “a case-by-case basis” rather than by a broader classification of roles.

In a letter sent to NHS providers in February, seen by The Register, NHS Improvement said: “There is still far too much use of Personal Service Companies (PSCs) to avoid tax. New HMRC rules coming into effect in April will have a material impact on this.

“HMRC will treat all public sector ‘self-employed’ contractors using a PSC as falling under IR35 and therefore treated for tax purposes as an employee. As a result of these new rules, we anticipate that providers will need to ensure all locum, agency and bank staff are subject to PAYE and on payroll from 1 April 2017.”

The final IR35 legislation clearly stated that ‘reasonable care’ had to be taken when making decisions over the IR35 status of public sector contractors. Put simply, this means that public sector employers and agencies should not make blanket determinations.

If public sector bodies fail to take take reasonable care over the rule changes, they will be responsible for deducting PAYE and National Insurance, and for paying Employer National Insurance rather than the contractor.

Earlier this year, Contractor UK reported that 30 contractors abandoned an overrun £16.5m health service IT project after an NHS trust said it would declare them all inside IR35 from 6 April.

Dave Chaplin, chief exec of ContractorCalculator, said that many public sector firms have discovered that blanket rules have had a hugely negative impact and highly skilled contractors have been leaving the public sector in droves.

“We have heard countless stories of private firms trying to lure locums to the private sector only for the NHS to increase the locum’s rates to counter the effects of blanket decisions. The IR35 reforms have been tantamount to a massive extra tax on the NHS and have led to utter chaos.”

What HMRC’s latest raid means for contractors

You don’t have to be one of the “UK individuals” to have their name contained in materials seized last week by the taxman to be thinking about recourse if you’ve used an offshore trust.

Concern about schemes that make use of such trusts (and loan arrangements) actually goes much wider. But it’s fair to say that those exposed in the HMRC raid – three “advisers” and their UK clients whose details are on the seized computers – will be the most concerned.

To the unaffected however, the HMRC raid will appear like just another offshore scheme being picked off. The unscrupulous characters sentenced in court, and contractors footing the bill in long term.

The unsympathetic might point out that HMRC have advised for a long time that they intend to hit these schemes; the exchequer needs it and the political spectrum widely signs off on it. But the potential for users to take legal action against the promoters if they advised them that such schemes were ‘fit for purpose’ has not diminished. The fallout from the collapse of this scheme, and its variants, therefore has far-reaching possibilities for bringing a large number parties to account.

With the debt transfer provisions in force, such scheme implosions could have an impact on advisers, promoters, intermediaries and engagers. In addition, although the incentive for former disguised remuneration scheme users to come clean has been extended to March 2017, recruitment agencies too aren’t sheltered, and are turning more and more risk averse.

Unfortunately for scheme users though; HMRC won’t necessarily go directly for the advisers/promoters/engagers of the scheme – ‘the big fish’ perhaps, because their officials will want the maximum return with the minimum effort. So they’re likely to pursue the scheme itself in the first instance, before targeting contractors among its other users. Whether that then results in a criminal investigation into the scheme is a separate issue and likely to depend on the findings of the initial HMRC enquiry.

Remember, the taxman’s view is that each taxpayer (or each company) is responsible for their own tax affairs and he will pursue on that basis, only subsequently looking at other options (e.g. via debt transfer provisions) once the initial option is exhausted. As even the unsympathetic will admit, the fallout from using this type of scheme is potentially life-changing for contractors, who in some circumstances will have simply fallen foul of bad advice.

If that’s you, then as a scheme user (whether it was an offshore trust and/or loan arrangement) you may have the right of recourse to the promoter/engager who sold you the scheme in the first place. Ultimately, this question of recourse is one to pose to a solicitor, although the likes of compliance specialist Qdos and contractor body IPSE can help too.

In a nutshell and oversimplified, the guidance from these parties will likely be that:

– if a contractor has been advised that such a scheme is compliant, AND

– the advice is documented; AND

– it can be demonstrated that the contractor has relied on this advice,

…then the contractor (and any other user who meets all of the above conditions) may have a case for recourse, assuming that they could not reasonably have expected to know that their scheme was potentially unlawful.

If you’re struggling to meet the above conditions, but are still affected by such schemes or have received an APN, it is imperative that you strongly consider professional, tailored advice at the earliest opportunity. Ignoring any notices or paperwork received from HMRC when in these waters could have perilous consequences.

An Introduction to Tax Planning

Tax planning is the legal process of arranging your affairs to minimise a tax liability. There is a wide range of reliefs and provisions that are available to legitimately reduce a tax liability without straying into the rather more challenging area known as tax avoidance.

Examples range from simply choosing a year-end date early in the tax year to maximise the period from earning profit to paying tax, to arrangements to shelter an appreciating asset from inheritance tax.

Tax evasion is different, it is illegally reducing your tax, such as falsifying figures or not disclosing income. This carries serious penalties which can include a criminal prosecution.

A problem arises when the law is unclear, so it is not obvious whether a tax planning scheme is within the law or not. For this reason, there have been several significant developments.

1. We have seen an ongoing approach to artificial tax avoidance which stands between avoidance and evasion. This was probably most accurately defined by one Paymaster General who said that: “Artificial avoidance schemes are those where they create economic distortions, provide commercial advantages over compliant taxpayers, redistribute tax revenues in an unfair or arbitrary manner, or represent an abuse that conflicts with or defeats the will of Parliament”.

These must be disclosed and are closely examined to see if they are legal. Even if they are, it is likely they will be closed in the next Finance Act, sometimes with retrospective effect.

2. A list of ‘hallmarks’ of tax avoidance schemes has been published. If any of the following are found in a scheme, it is likely to be challenged as artificial tax avoidance:

– It sounds too good to be true

– Artificial or contrived arrangements are involved

– It seems very complex for what you want to do

– There are guaranteed returns for apparently no risk

– There are secrecy or confidentiality agreements

– Upfront fees are payable or the arrangement is on a no win/no fee basis

– The scheme is said to be verified by a top lawyer or accountant but no details of their opinion(s) are provided

– The scheme is said to be approved by HMRC (it does not follow that this is true)

– Tax benefits are disproportionate to the commercial activity

– Offshore companies or trusts are involved for no sound commercial reason

– A tax haven or banking secrecy country is involved without any sound commercial reason

– Tax exempt entities, such as pension funds, are involved inappropriately

– It contains exit arrangements designed to sidestep tax consequences

– It involves money going in a circle back to where it started

– Low risk loans to be paid off by future earnings are involved

– The scheme promoter lends the funding needed.

Businesses promoting schemes with these “hallmarks” must notify HMRC about the scheme and register it, obtaining a “DOTAS” number for the scheme. They must then notify those who have used the scheme at their suggestion, who must then disclose this on their tax return. There are some very onerous obligations on promoters of tax avoidance schemes, including providing HMRC with a regular list of their clients and customers.

3. There is a General Anti Abuse Rule (GAAR)which enables HMRC to take action to counter any abusive avoidance activities without making specific legislation to close the schemes down individually. Where HMRC wish to challenge an arrangement under the GAAR, the detail will be considered by a GAAR panel of tax professionals to advise whether the arrangements are abusive or not.

4. Where a taxpayer has participated in a scheme which reduces or defers their tax liability, once HMRC are notified of the scheme they will issue an accelerated payment notice. Essentially this undoes the cash effect of the scheme until the case goes to court which may be many years later, so the benefit of using the scheme is significantly delayed.

Please ensure that you seek our advice with regard to all aspects of tax planning.

  • logo
  • logo
  • logo
  • logo