IR35 Off-Payroll Reform – Draft Legislation Released

The eagerly awaited draft legislation has now been published by the Government for extending the public sector IR35 reforms to large and medium sized businesses in the private sector, impacting an estimated 170,000 individuals and 60,000 engager organisations, although many subject matter experts put the number far higher than that.

Despite speculation about a delay to the introduction of these changes, the publication of the draft legislation unfortunately keeps the government on course for implementation on 6 April 2020.

If you’ve been following the changes then you will be aware that the intent of the legislation is to ensure that two people working side by side in a similar role for the same business pay the same taxes, regardless of how they are engaged with the business or the sector they work within.

The draft legislation, which is now open for consultation until 5 September 2019, will be introduced in this Autumn’s Finance Bill.

What you need to know

The draft legislation is broadly in line with the rules already in the public sector, save for the following main changes:

• Small company definition confirmed

‘Small’ companies and ‘small groups’ of companies, as defined by the Companies Act will not be required to operate these rules if they are the end user of the PSC’s services. The same tests will apply for Limited Liability Partnerships. For other unincorporated entities, the Companies Act’s turnover test will be the only test that applies.

• A new status determination statement

The draft legislation introduces the statutory concept of a “Status Determination Statement” or “SDS”, which clients will be required to provide directly to the worker and any third party they contract with. The legislation then facilitates this SDS being passed down the labour supply chain until it reaches the fee-payer.

The SDS must include not only the decision of the client’s “deemed” employment status, but also the rationale for reaching this conclusion. This changes the existing public sector rules which only places an obligation on the client providing this rationale within 31 days where there has been a specific request for it.

There is also a new explicit requirement for clients to take “reasonable care” in undertaking status assessments but unhelpfully, there is no definition as to what reasonable care means. However, the requirement to provide rationale should alleviate some of those who feared “blanket assessments” would become the norm.

Failure to take reasonable care or failing to provide an SDS will result in clients being deemed the fee-payer where they are not already, and thus the entity responsible for PAYE/NIC withholding and any liabilities for failing to do so or incorrect determinations.

There are mixed views around the value of the SDS and whether they are just another administrative burden on the client, particularly as HMRC aren’t anticipated to produce templates for businesses to use, or, if the issuing of the SDS will mean more transparency and help reduce the risk of incorrect determinations.

• A statutory regime for dispute resolution

The original consultation suggested that there was a need for an end user-led status disagreement process and this has materialised with statutory rules in the draft legislation.

 

Despite masses of responses to the Consultation suggesting this was grossly unfair and should be reviewed, the Government have persevered on the basis that the end client is best placed to resolve status disagreements in real time as they believe that the vast majority of end clients have HR or procurement functions that will be able to make determinations.

At any point following receipt of an SDS, the worker or fee payer may make “representation” to the end user where they are not in agreement with the SDS issued. The end user client will then need to respond within a 45 day time frame, informing the worker or the fee payer of the outcome of its considerations. If it is concluded that the original determination was correct, it must provide the reasons why it believes the original determination was correct. If on review it is concluded that the original determination was incorrect, the end user will be required to issue a new status determination statement to both the worker and the fee payer.

It is currently unclear as to how the PAYE/NIC treatment during a prior period is to be rectified following a representation that results in a change to the SDS.

HMRC do acknowledge the additional work this will create but that will be little comfort for the contractor when there is little bite within the legislation to suggest that an engager might actually overturn their original decision.

• Transfer of liability

The draft IR35 legislation and the Government’s response to the off payroll working policy paper and consultation confirms that the controversial transfer of liability provisions will form part of the new IR35 rules from 6 April 2020.

This legislation has not yet been published, however it is expected they will allow HMRC to transfer those liabilities to an agency at the top of the labour supply chain (i.e. the first agency which has the direct contractual relationship with the end-client) or to the end-client, where there is non-compliance further down the labour supply chain and it is not possible for HMRC to collect the amounts due from the offending party.

HMRC have stated that these transfer of liability provisions will only be applied in specific circumstances, for example where tax avoidance is involved rather than where there is a genuine business failure.

We won’t know exactly how these transfer of liability provisions will work in practice and how businesses can protect themselves from the transfer of liability until HMRC guidance is issued and the PAYE regulations (which still require amendment to introduce these transfer of liability provisions) are updated.

What is clear though, is that their contents will impact the requirement for end clients, agencies and intermediaries to have additional contractual protection in contracts.

What’s Next

With only 8 months to go before the legislation comes into play, businesses must act now given the number of key stakeholders who will have to be involved and steps that will have to be undertaken to assess the impact and ensure compliance ahead of 6^th April 2020. At AAB, we have a dedicated team of IR35 off-payroll working experts who can help – see more here.

For more information please contact Charlotte Edwards (charlotte.edwards@aab.uk) or your usual AAB contact.

To find out more about Charlotte and the Payroll and Employment Taxes team click here.