IR35 reform: 7 things contractors should know about the government’s latest announcement
The government’s latest consultation sets out its current position and calls for contractors and freelancers to have their say on rules being introduced in April 2020.
There was no further IR35 news announced in Philip Hammond’s Spring Statement on 12 March – but contractors hoping for further details should look to HMRC’s IR35 consultation launched the week before.
Previous IR35 consultations have given an insight into HMRC’s intentions, so what can we learn from the latest announcement?
HMRC won’t look at other approaches for IR35 reform
“This consultation is not intended to consider alternative approaches to tackling noncompliance with the off-payroll working rules.”
While IPSE’s Andy Chamberlain suggests the government should “scrap the dangerous reforms to IR35 once and for all”, the consultation doesn’t give contractors hope of that happening.
The paper (and the language used) reiterates the government’s plan to “bring the private sector in line with the public sector” by making clients responsible for determining a contractor’s IR35 status.
HMRC also takes the “interaction between employment rights and being taxed like an employee” out of the scope of the consultation, so there’s no clarity around rights if you’re ultimately found within IR35.
2. Contractors will need to know whether a client is ‘small’ or not
“…the government has decided that the smallest organisations will not be affected by the reform.”
HMRC has listened to concerns highlighted at the time of the Autumn Budget, that smaller organisations will find it difficult to make the changes. This means that if a client is ‘small’, contractors will still determine their own IR35 status.
The consultation says HMRC will follow the Companies Act definition of a smaller company when deciding on exempt organisations:
an annual turnover of no more than £10.2 million
a balance sheet total of no more than £5.1 million
no more than 50 employees
But at the same time, the paper acknowledges that the Companies Act definition doesn’t apply to unincorporated businesses.
Here HMRC suggests two options – to apply the reform to “unincorporated entities with 50 or more employees and to entities with turnover exceeding £10.2 million” or “to apply the reform only to unincorporated entities that have both 50 or more employees and turnover in excess of £10.2 million.”
While it falls on clients to know whether they’re a small organisation, there are still questions around when exactly contractors should be told they’re working for one.
To make sure you’re not caught out in April 2020, IR35 expert Joe Tully, Managing Director of Brookson Legal, writes in Contractor UK that “it will be vital that contractors know the size of the business they are working with and what this means for them.”
3. You may be able to challenge a client’s decision…
“…it may be necessary for a process to be put in place to allow for determinations to be challenged.”
HMRC recognises the rules should be applied “properly and consistently” depending on the facts of each individual engagement.
So, while the tax body claims it hasn’t seen “evidence to suggest widespread blanket decisions are being made in the public sector”, the paper suggests it has listened to concerns that public sector organisations haven’t fully considered the facts of each role before making status decisions.
HMRC’s proposed solution is to require clients to give the contractor (and fee-payer) reasons for the status decision, along with the status decision itself. Then if the contractor isn’t happy, they’ll be able to challenge the decision.
4. …but clients could still have the final say
“The introduction of a client-led status disagreement process would allow organisations to tailor the process to fit in with their wider business processes…”
While it comes as positive news that contractors will be able to challenge decisions, the consultation hints that the process will exist just to make sure each client takes “reasonable care when reaching its final view on the status determination of the engagement”.
The paper only goes as far as to propose the second stage of the disagreement process should involve the client hearing evidence from the contractor, before telling the contractor the final outcome.
As Joe Tully notes for Contractor UK, the consultation seems “end-hirer focused” and doesn’t give any suggestion that HMRC has thought about what further arbitration would look like. In the proposal’s current form it looks like the buck stops with the client, rather than an independent arbitrator or even HMRC itself.
5. What about CEST?
”HMRC continues to work with stakeholders to identify improvements to CEST and wider guidance to ensure it meets the needs of the private sector.”
HMRC introduced its Check Employment Status for Tax (CEST) tool in 2017 and it hasn’t been universally loved – last year we reported that it doesn’t take a key part of IR35 case law (Mutuality of Obligation, or MOO) into account.
At the Autumn Budget, HMRC committed to improving CEST but the new consultation doesn’t offer any hint as to what those improvements might look like. What’s more, there are no questions about CEST that contractors can respond to.
As Contractor Calculator CEO, Dave Chaplin, says: “Should any changes be made, they need to happen at least six months before the rules are introduced, which HMRC has not guaranteed.”
6. HMRC gives recommendations on how to prepare for reform
“Organisations affected by the reform should take the following actions now to prepare for the reform.”
While these four recommendations are again end-hirer focused, the first one is an action that contractors can take on themselves:
organisations should “identify and review their current engagements with intermediaries, including PSCs and agencies that supply labour to them”
One year might sound like a long time, but self-employed contractors (and their clients) should be doing everything they can now to prepare for the upcoming change.
As Joe Tully mentions for Contractor UK, this will mean proactively speaking to clients and making sure they’re putting all the right processes in place to manage the change in April 2020.
7. You have until 28 May to reply
“Responses should be sent by 28 May 2019, by e-mail to: firstname.lastname@example.org or by post to: Employment Status and Intermediaries Policy, 3C/15, 100 Parliament Street, Westminster, SW1A 2BQ.”
HMRC is seeking responses to 18 questions. It says the consultation is at ‘stage two’ of the process, which means they’re looking for views on the detailed policy design and the framework for implementing the reform.
Stage three is when legislation will be drafted, so responses could help shape the details of the rule change.