IR35 compliance moves up the ladder

The Government confirmed in the autumn Budget that from April 2020, businesses will become responsible for assessing employment tax status and ensuring the right amount of tax is paid for individuals whose services they engage through a personal service company (PSC). HM Revenue & Customs (HMRC) has published a consultation on how the new rules will operate in the private sector.

Tax rules known as IR35 require people who provide services through PSCs to pay employment taxes if they would otherwise have been regarded as an employee of the engaging business. Currently, where a person provides services through a PSC to a private sector business, the responsibility for the tax status determination and payment of any employment taxes due lies with the PSC. Under the new regime, that liability is reversed; the engaging company will determine whether the IR35 rules apply and will be liable to operate PAYE and pay employer’s national insurance contributions (NICs). The purpose of the reversal is to increase compliance with the IR35 rules.

Public to private sector

The full scope of the rules has not yet been determined. HMRC proposes to base the legislation on the public sector off-payroll working rules, with some amendments. This starting point is useful, as it allows some lessons from the public sector rollout to be used to guide the implementation of the new legislation. HMRC acknowledges this in its consultation, identifying a number of points not currently covered within the public sector legislation. For example, the public sector rules have no requirement for the off-payroll worker to be given a determination by a client directly, nor is there any legislative right for the off-payroll worker, or fee-payer, to seek the reasons for the determination. 

The “Check Employment Status for Tax” (CEST) tool, launched by HMRC in 2017 to help the public sector assess employment status for tax purposes, has been criticised as a blanket approach where a nuanced assessment is required. The Government accepts that there are concerns as to the capabilities of CEST, particularly should it be applied to the complex private sector, and intends to reform the tool to help it to meet these needs. 

Inherent differences between the public and private sector mean that various elements of the legislation as it applies to the public sector will require to be varied. HMRC is seeking views on a number of aspects, such as how disputes over contractor status determinations should be resolved, and the best method of defining “smallest” businesses, which will be excluded from the legislation.

Complex supply chains

Private sector labour supply chains are often long and complex, and this is one of the main focuses of the consultation. The Government presented several questions on how best to manage complications and avoid disputes over liability where there are several entities between the business engaging the PSC and the entity that pays its fees. It intends to short-circuit long supply chains by requiring clients to provide the determination directly, as well as the reasons for that determination on request. The fee-payer (who may be further down the supply chain) will then be required to make deductions for income tax and NICs and pay any employer’s NICs to HMRC. 

Perhaps of most concern to engaging businesses is the Government’s proposal that where a liable party ceases to exist or is otherwise unable to pay, tax liability will move to the next person above them in the contractual chain. HMRC would ultimately be able to seek payment from the client. It will therefore be important for businesses to monitor their supply chain and avoid unexpected tax liabilities by building in the appropriate contractual protections. 

Next steps

Businesses in industries such as infrastructure and energy, which rely heavily on specialised contractors, will face significant cost and compliance challenges. The draft legislation is set to be published in the Finance Bill at the end of summer 2019, and the consultation recommends that affected businesses take action now, such as identifying and reviewing their current engagements with intermediaries, and reviewing arrangements for the use of contingent labour. Businesses that utilise PSCs should endeavour to engage with and understand any developments to the proposed legislation that stem from the consultation, to ensure that they avoid suffering major disruption from April 2020.