HMRC’s recent guidance about the public sector IR35 reforms, ‘Off-payroll working in the public sector: reform of intermediaries legislation’, suggests that the adoption of the changes will be simple when in truth it will descend into chaos.
From issues surrounding the tax treatment of invoices where payment transits the IR35 implementation date, to the complexity of the Real Time Information (RTI) process, the taxman’s latest advice poses more questions than answers.
Who controls my tax deduction?
The big news is the confirmation that payments made to workers after 6 April for work carried out before that date are within scope of the new rules. This means public sector bodies (PSBs) making payments one month in arrears essentially have a 6 March deadline to ensure compliance. That’s not even taking into account those that pay invoices after 60, 90 or even 120 days whose contractors will already be impacted.
A contractor could be clearly outside IR35, but if the PSB isn’t able to demonstrate due diligence in determining their status, the agency will be required to tax the contractor as an employee.
Even worse, if the PSB simply ignores its responsibility to test a contractor, the contractor by default is taxed as if they are caught by IR35. Unsurprisingly, HMRC makes no provisions for retrospective changes to contracts to cater for invoices waiting to be paid.
This would all be legal, and the only way a contractor could recoup that money is by appealing the decision. It’s a draconian regime in similar ilk to the Accelerated Payment Notices (APNs) scheme, and we urge all contractors to get reassurance over their IR35 status before entering a new contract.
When is HMRC’s Employment Status Service (ESS) due?
PSBs in urgent need of a compliance solution can’t look to HMRC anytime soon, after it confirmed that the ESS won’t be made available until the end of February. This means PSBs planning on adopting the ESS will have at most a couple of weeks to assess their contractors before 6 March hits. So where else can PSBs look?
It takes an IR35 expert roughly an hour to manually test a contractor’s IR35 status. With HMRC estimating that 26,000 public sector contractors will need assessing, there simply aren’t enough experts to test all of the contractors before the reform.
Our automated solution is live and free-to-access for contractors. It has been used more than 100,000 times since we introduced it in 2009, and we’ve recently considerably enhanced it, almost doubling the amount of questions asked for a swift yet hugely comprehensive IR35 evaluation. To find out more, contact the team, or take the test to see how it works.
Unanswered questions could cause contractor-client standoff
Beyond this though, HMRC still leaves a lot of questions unanswered. Our IR35 tool is capable of mass testing the public sector contractor workforce in time. But then what happens to those who need changes to their contracts to pass IR35?
What about historic invoices that are due where a contractor disagrees with a PSB’s IR35 decision? It’s highly unlikely that a contractor will roll over and take the tax hit.
They will more likely insist that they are paid for their past work as outside IR35. Now we’re faced with a deadlock that the taxman didn’t anticipate.
Will agencies apply Real Time Information (RTI) to contractors?
For contractors irrevocably caught by IR35, agencies suddenly have a lot more on their plate. HMRC notes that agencies – or PSBs if an agency isn’t involved - are required to:
- Operate employment taxes
- Pay the deemed direct payment to thecontractor
- Report tax and National Insurance Contributions (NICs) to HMRC through RTI
- Pay employers’ NICs.
Much of this is outside the remit of a recruitment agency, and the RTI process that the taxman explains is far too convoluted. We’ve repeatedly highlighted before how the adoption of this process will simply prove too costly and tasking for many agencies and PSBs, and nothing has changed since then.
The likely outcome is that a Pay As You Earn (PAYE) umbrella is introduced into the mix. This offers simplicity for all involved. The contractor isn’t required to ring-fence limited company money into two types of payment, whilst the agency doesn’t have to adopt RTI.
These are just a few issues that are all indicative of a short-sighted approach by HMRC that is going to cause chaos in the public sector. Previously we’ve called the public sector IR35 reforms a potential car crash. Now it looks more like a pile up.