Government has published the draft legislation of its Off-Payroll private sector proposals today as part of the provisions for the Finance Bill 2020, demonstrating that most of the serious concerns raised during consultation have been ignored.
The key points are:
- Private sector clients will be responsible for assessing contactors’ IR35 status from April 2020, shifting this responsibility from contractors as has been the case since IR35 was first introduced
- When assessing IR35 status, clients must complete a status determination, so in theory there can be no blanket assessments placing contractors inside IR35. However, clients can still insist that their contractors go on the payroll
- Calls for an independent appeals process have been ignored. Instead, a new ‘client-led status disagreement process’ is to be introduced. As a result, if a contractor disputes their status assessment they can only appeal to their client, who may have an interest in their contractors being inside IR35
- Small companies remain exempt from the new legislation, as defined by the Companies Act.
The publication comes less than two months after the conclusion of HMRC’s latest Off-Payroll consultation. Responding to this, industry stakeholders had expressed grave concerns over many fundamental issues with the existing public sector regime and HMRC’s private sector plans.
However, having failed to address most of the issues highlighted, the draft legislation has done little to reassure the industry, as ContractorCalculator CEO Dave Chaplin highlights:
“Firms are essentially being asked to judge tax crimes before they have been committed and to sentence taxpayers before the facts are known, with no way to appeal to a court.”
“Not only that, but HMRC is loading the dice to encourage firms to judge the taxpayer guilty from the start. HMRC’s legislative proposals are a stunning example of our tax authority abusing its powers.”
The legislation’s rushed process and poor timing will damage UK plc
He continues: “Government gave itself a little over a month between the consultation deadline and the publication of this draft legislation. As a result, it has inevitably failed to grant proper consideration to the many legitimate concerns raised. To legislate the Off-Payroll private sector rules in their current draft format would mean increased costs and compliance burden and chaos for UK plc.”
“The reforms will be devastating for the UK economy and I would urge our next new Prime Minister to take a sensible look and a sensible view before pressing ahead with these damaging proposals,” warns Julia Kermode, chief executive of The Freelancer & Contractor Services Association, “The UK’s economy is in a delicate state right now and these reforms will do little to alleviate the UK’s problems.”
“Nothing overall to protect contractors,” notes JSA Group’s Chris James, “and no addressing the elephant in the room - that with Brexit still in the air, and the UK trying to keep international business based here, there couldn't be a worse time to introduce this legislation - it appears to be a vanity project.”
Government criticised for failing to address consultation concerns
The inclusion of the Off-Payroll draft legislation itself confirms Government’s intention to proceed with plans for an April 2020 rollout.
This is despite calls from consultation respondents to delay to the proposals, with many highlighting that firms will only have five months to prepare, with legislation expected to be finalised in November 2019.
Initial analysis of the legislation suggests that virtually all the key consultation concerns have been ignored, further underlining HMRC’s total lack of accountability to the taxpaying ‘customers’ it is supposed to serve.
According to James: “Unfortunately the consultation response and the draft law doesn’t appear to have addressed the consultation responses, especially on the appeals process, size exemptions or the timing of the reform.
“Many consultations responses questioned the timing of the reforms, given that Brexit is delayed and that other employment status reforms are still in progress. On this point, the consultation response merely thanked respondents for their time, but ignored the concerns.”
Kermode believes there is a deeper issue: “We know from our lobbying activities that Government and policymakers do not understand our sector or fully appreciate the implications of their policy decisions and today’s draft bill confirms this.
“They claim to have listened to stakeholders’ concerns, but today’s bill simply highlights that they have simply paid lip service to listening.”
Call for independent appeals process ignored
A key criticism of the public sector implementation has been the lack of a suitable appeals process for contractors to dispute status assessments.
HMRC’s proposal for a client-led dispute resolution process in the private sector inevitably came under fire, with consultation respondents demanding a solution led by an impartial third party. However, these calls have so far gone unheeded by Government – instead the ‘client-led status disagreement process’ will be introduced.
Kermode is shocked at this move: “I am enraged and shocked to read that [the Government] will be introducing a statutory client led status disagreement process which will place significant unfair burden on clients.
“The appeals solution leaves contractors vulnerable, as James highlights: “The appeals process is still run by the end user, so there is no meaningful independence involved. The power is entirely in the hands of the end user, so the contractor isn't really protected.”
Clients are not IR35 experts, so how can they enforce it?
The legislation requires clients to assess status before the contract has even started, ignoring the realities of the working relationship on which IR35’s core hypothetical contract is based.
Valentine’s view is that clients are largely ignorant of the details of employment status basics: “The [Government] has taken the view that clients are aware of their requirements from day one and can distinguish between the need for a temporary worker to fill a role, a contract of services, and for a genuinely self-employed contractor to be engaged to deliver a specific service, a contract for services. In reality, clients often don't fully understand this crucial distinction and only see the individual representative during the course of the recruitment process."
“No contractor should consider starting a contract without understanding their IR35 status,” notes Chaplin.
Valentine believes there may be a silver lining: “The client-led status disagreement process will at least provide an opportunity for all contractors to seek competent legal advice on the true status of an engagement and make representations to the client that the status determination is incorrect within 45 days of receipt of the status determination.
“Although the draft legislation purports to replace s.61T Income Tax (Earnings and Pensions) Act 2003, the consequences for the client of ignoring the contractor's or deemed employer's request are the same as before – the client merely becomes responsible for PAYE and employer's National Insurance contributions instead of the deemed employer. This is little comfort for an aggrieved contractor wrongly denied the opportunity to work on an off-payroll basis. Regrettably, in the rush to publish the draft legislation the Government overlooked proposals to use the Arbitration Act 1996 as a means of expedited status dispute resolution. Contractors are now likely to offset adverse status determinations by demanding correspondingly higher pay. Unscrupulous risk averse clients can simply adopt a 'copy and paste' approach to status determinations thus covertly applying blanket assessments.”
So, contractors are not only vulnerable, but contrary to the Government’s claim, look set to be further inconvenienced and out of pocket, as Kermode explains: “…the policy note states that PSCs will be better off as they will no longer have to manage their own status determinations or incur accountancy fees either.
“However, what they neglect to state is the significant number of PSCs that will be worse off due to being unfairly taxed if their IR35 determination is incorrect, and the fact that any PSC that has a mix of inside and outside IR35 determinations during a financial year is actually more likely to need an accountant to work out their true tax position!”
Small business exemption ‘of little practical benefit’
The small company exemption is of little practical benefit for contractors says Martyn Valentine of The Law Place Limited: “As currently drafted, the legislation will not apply to private sector clients where a client meets the criteria for a small company in sections 382 and 383 Companies Act 2006, i.e. the client's company must have a turnover of less than £10.2m, balance sheet total £5.1m or less and fewer than 50 employees. Significantly, this applies to group companies too, so will affect management consultancies that are partly owned by a larger company. Further research is needed as to whether this exemption is worth the paper it's written on.”
James suggests that, as the legislation is written, there is plenty of scope for confusion: “The process is that if you receive a determination then you know the end user thinks they are not exempt - so not small. If you don't receive one, you assume they're small. I asked [HMRC] today why they don't just insist that any end user is obliged to confirm their size and therefore whether they're exempt. They said Government doesn't want to cause an administration burden for small business. But small business knows if it's small, it says so in their accounts. So, no burden. But this will cause lots of worry for many contractors, who are themselves small businesses!”
Tax liability controversy ignored
HMRC’s consultation also posed complicated plans to pass tax liability through the supply chain where non-compliance has arisen. Controversially, HMRC’s consultation proposed that the agency at the top of the supply chain assume liability in the event that the taxman is unable to retrieve sums owed from an offending party further down.
The liability would ultimately transfer over to the client if HMRC fails to collect the liability from the first agency. This worries Valentine, as he explains: “Ominously, paragraph 15 of the draft legislation allows the PAYE Regulations to be amended, with the effect that HMRC can decide to collect PAYE liabilities from a different party within the supply chain, for example a master vendor or second-tier supplier.”
Despite the obvious and inevitable criticism of rules that risk imposing unfair tax liabilities on compliant parties, it appears as though Government intends to proceed with these plans, as James confirms.
“Liability can rest with compliant parties. Agencies will have to watch parts of their supply chain for years to look for potential liabilities arising from the normal course of business. HMRC have said they will only use liability transfer where cases deserve it - but we are asked to take that on trust.”
How does the draft legislation differ from Chapter 10?
Given the similarities between the draft legislation and Chapter 10, Part 2 of the ITEPA, which dictates the public sector implementation, there will be further criticism levied at HMRC, not least because it has already been accused of merely going through the motions with the consultation process.
Meanwhile, the tax calculations are to remain the same as in the public sector, although further clarity from Government appears necessary to ensure that firms comply. Apparent confusion over the employer’s National Insurance (NI) liability has reportedly resulted in many public sector clients making unlawful deductions from payments to contractors. The issue hasn’t been helped by HMRC’s public insistence that the Off-Payroll rules do not impose a new tax liability.
“The draft legislation does not remove the strict legal obligation upon the fee-payer in section 61N(3) to separately pay employer's National Insurance contributions and not make a deduction from the deemed direct payment,” says Valentine. “This has been the law since 1992. Getting it wrong, whether or not deliberately, has very serious consequences."
Join the Stop the Off-Payroll Tax campaign, now
Though the draft Finance Bill deals another blow to the contract sector in its fight against the Off-Payroll rules, there is still time for Government to take notice of serious flaws in the legislation. In the meantime, Chaplin urges contractors to help prevent irrevocable damage to the contracting sector by joining the Stop the Off-Payroll Tax campaign today. And if you want to learn the most complete IR35 process then head here.
“Now is the time for contractors and other stakeholders, including clients and the contracting industry supply chain, to join the fight through practical measures such as supporting Stop the Off-Payroll Tax campaign and lobbying their MPs.”