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IR35 public sector reform guidance poses more questions than answers for contractors

Contractors operating in the public sector have gained some answers about the proposed changes to how their employment status will be determined, but plenty more questions remain.

In a technical briefing provided directly to ContractorCalculator, HMRC outlines its plans to shift liability for determining a contractor’s IR35 status to the public sector body or agency.

However, as ContractorCalculator CEO Dave Chaplin highlights, the document throws up far more questions than answers: “There are numerous oversights in this document which I’m sure stakeholders will be keen to query during the consultation.”

The briefing states that legislation will be introduced in Finance Bill 2017, with a consultation due to be published before the summer. The document also gives details of upcoming guidance to support contractor clients, as well as instructions for calculating tax for contractors caught by IR35, which is actually the same as the current deemed payment method.

Digital tool set to ease public sector burden

One notable inclusion within the document is mention that HMRC intends to develop new tests and a new digital tool to simplify the decision and ease the burden for public sector bodies.

The document reads: “In partnership with stakeholders, HMRC will introduce clear, objective tests for employers to use to quickly and decisively identify those engagements that are clearly caught by the rules.

“For cases that are less clear cut, HMRC will develop a simple and straightforward digital tool to provide employers engaging an incorporated worker with a real-time HMRC view on whether or not the intermediaries rules need to be applied.”

However, as Chaplin points out, the complexities surrounding IR35 mean any HMRC tool would be able to offer nothing more than guidance for the engager, with the ultimate decision resting with the courts.

“We all know about the complexities of IR35. If determining a contractor’s employment status was that simple, we wouldn’t have had this ongoing saga for the past decade-and-a-half.”

What about the right to appeal?

The indeterminate nature of HMRC’s solution looks likely to create more complication. Very few contractors are going to readily roll over and accept higher tax rates, based on a HMRC tool.

This in turn raises questions about an appeals process. Contractors must be granted the right to appeal their outcome, as any tool or test that HMRC provides can be proven wrong in court. However, this is an issue that currently receives no coverage within HMRC’s guidance.

As Chaplin points out, there doesn’t appear to be any way around the matter for HMRC: “To avoid an appeal, the client would have to determine and agree the contractor’s status prior to the contract start date. This doesn’t work either.

“To fully gauge a contractor’s IR35 status you have to look at the whole picture. This includes every aspect of their working arrangement, including off-payroll details to establish whether the contractor is in fact in business on their own account. This can’t happen until they have started their contract.”

Contractor co-operation unlikely

One knock-on effect of this is likely to be a reduction in contractor availability for public sector organisations, worsening skills shortages in public sectors already devoid of enough talent to maintain frontline service delivery.

In addition, as chief executive of the Association of Independent Professionals and the Self Employed (IPSE) Chris Bryce pointed out earlier this week, contractors who are taxed as employees will inevitably demand benefits in accordance:

“Once you label a freelance business owner an employee, he or she will expect holiday pay, sick leave and other employee benefits which will have to be paid for by the taxpayer.”

Cash neutral regime for Government?

During the Budget, the Chancellor announced that the new measure, alongside other tax avoidance and evasion policies, is expected to generate an additional £12bn in tax. However, for contractors who continue to offer their services within the public sector, the outcome will inevitably be an increase in rates across the board.

One potential solution to provide clarity that Chaplin proposes is for the public sector body to explicitly define the employment status of a role and advertise whether it is inside or outside of IR35 prior to seeking candidates.

“The contractor can then quote accordingly,” he adds. “Rates will inevitably rise and the contractor will end up with exactly the same amount of net income. It would be wholly unfair to hire somebody on a contract basis and then change the way they are taxed mid-way though.”

This poses further questions regarding the practicality of the Government’s plans, as the expected broad-based rise in contract rates would eat into public sector funds. Chaplin concludes that more tax money would simply be circulated between public sector departments at no ultimate gain, in addition to an unnecessary increase in paperwork.

Contracting sector urged to oppose policy

Legislation is set to be introduced in Finance Bill 2017. However, there is no indication given as to what will happen with contractors whose contracts begin prior to its introduction, but extend beyond the date of its implementation.

This is another area of uncertainty that will need to be addressed in the upcoming consultation, but for now Chaplin expects to see contractors taking steps to protect themselves for the worst case scenario.

“I wouldn’t be surprised to see contractors begin to negotiate clauses in their contracts stipulating that their rates rise in the instance that they are caught by IR35.”

Whilst HMRC’s document gives a sufficient outline of the regime from an engager’s perspective, once you get into thinking about the detail there are too many factors that effectively render it a non-starter.

According to Chaplin, the responsibility now rests with contracting stakeholders to ensure it doesn’t come to fruition: “The Treasury has advised against this, but the Government has decided to proceed. It’s now up to the contracting sector to try and put a stop to it. Organisations such as IPSE need to step up to the plate. It’s their time to shine.”

Published: 21 March 2016

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