IR35 public sector changes

IR35 public sector changes

If you read our Autumn Statement predictions and review you’ll already have seen us talk a lot about proposed reforms to IR35 from April 2017. In the Autumn Statement, just two weeks ago, it was announced that reforms for contractors working in the public sector would be introduced on 6 April 2017. Yesterday, 5 December 2016, HMRC released their responses to the consultation earlier this year, additional guidance, and the draft legislation.

 

The changes will apply to all payments made on or after 6 April 2017. It’s important to note that this means all payments, even if the work was undertaken before 6 April or the contract agreed before that date.

 

HMRC have effectively created a completely new form of IR35, despite their assurances not to. Public sector work has been entirely excluded from the old IR35 and is now subject to its own specific “son of IR35”, called Chapter 10.

 

Although there is new legislation the actual basis for assessing “employment status” remains unchanged. Therefore if you were outside the old IR35 then you should expect to also be outside “son of IR35”.

 

The chain of supply

The draft legislation recognises the chain of supply, with the worker’s intermediary at the bottom and the end client at the top, defining the parties between in terms of whether they are higher or lower than one another. The party that pays the intermediary will be referred to as the Fee Payer (“FP”).

 

The FP’s responsibilities

Whilst the end client will be responsible for assessing whether conditions of employment are met, and for confirming the status to the FP, who will be responsible for determining how the new rules apply. To help them, the end client will be legally responsible for providing information on employment status to enable the FP to correctly apply the rules. If the end client fails to do so (within 31 days) they will be held accountable and forced to stand in the shoes of the FP.

 

Although the employment status test remains unchanged, there are fears that end clients will oversimplify the test, and alongside the FP take the line of least resistance, assessing many public sector workers as deemed employees subject to the new legislation.

 

Assessing working relationships

The legislation appears to suggest that the contract itself has a greater part to play in the assessment of working relationships. This is different to current thinking in the contracting industry, which suggests that day to day working practices have far more impact on one’s IR35 status than the contract itself.

 

It was also a surprise that the end client would play a major role in assessing whether the conditions of employment are met, or whether the FP will be able to reconsider the status applied.

 

The explanatory notes accompanying the legislation don’t explain this change, and whilst it does not appear there is any intention to rewrite the general employment test, the emphasis on the contract is still unclear.

 

What happens if you are caught within IR35?

The FP will deduct Income Tax and primary National Insurance from the payments made to your company. You may also find deductions from your normal contracted rate for Employers NI and the Apprenticeship Levy, as these will be liabilities the FP must also meet. Whatever happens, the FP won’t be meeting these costs and expect many contracts to be terminated or renegotiated between now and 6 April 2017.

 

In many respects the FP will account for you as an employee and will expect you to provide them with personal tax details. You are required to provide these under the new regulations.

 

The FP will report the income paid to you and the tax deductions alongside its own employees to HMRC. All very confusing because you will be taxed as an employee of the FP, whilst employed and paid by your company, but don’t for one minute expect that being taxed as an employee by the FP gives you any employment rights or rights to statutory payments or pension auto-enrollment. Government has been very careful to avoid assuming those responsibilities on behalf of the public sector.

 

At the end of the contract the FP will issue you a P45 and you will use that to declare your income on your personal tax return.

 

The worker’s responsibilities

The worker will be responsible for providing personal tax details to the FP, such as National Insurance number and tax code. This is particularly important because an emergency tax code would apply if a tax code is not provided.

 

Permitted deductions from the payment amount

The only permitted deductions by the FP will be:

 

  • VAT included in the payment made
  • Expenses incurred and recovered from the end client (and therefore included in the payment received)
  • Employment expenses incurred by the worker or intermediary

 

How this affects your company

Your company will not have to pay tax on the public sector income assessed as employment income under these new rules, and will be able to claim deductions for capital allowances and pension contributions not previously allowed by the FP.

 

Your company will not need to report any payments made to you personally that have previously been taxed by the FP, but will need to make a repayment claim for tax relief denied by the FP.

 

This is going to make your personal tax and that of the company not just messy but clearly at risk of double taxation. You will need to rely upon advisers that have a very clear understanding of the new legislation, otherwise tax relief may be lost or income taxed twice, especially where you have both public and private sector income.

 

Your company will deal with VAT in the normal way.

 

Intouch and what we are going to do

It’s time for legitimate contractors to have a voice. These proposals were intended to counter avoidance, but the draft legislation will most likely adversely affect legitimate Limited Company contractors. Whilst we have participated at various levels and engaged with HMRC, Government has not listened and has taken a very naïve path in the hope it will get them where they want to be.

 

Intouch will continue to argue the case on behalf of our clients and ensure its services to contractors help ensure their status is correctly assessed and taxed.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Breaking news! Does today’s Autumn Statement harm or help Limited Company contractors?

Breaking news! Does today’s Autumn Statement harm or help Limited Company contractors?

Philip Hammond today delivered his first Autumn Statement as Chancellor of the Exchequer (and his last). He and the Prime Minister continue to compete for control of economic policy and are arm wrestling for the “glory sound bites”. Unless they get on the same page, the losers of this Pyrrhic victory will be you and I.

 

Famous for ill-conceived strategies implemented at a dangerous pace in the face of universal criticism, and ignoring calls for caution from industry experts (who HMRC asked for advice in the first place), HMRC and the Treasury just keep ploughing their own furrow regarding the flexible workforce.

 

Today’s statement offered public sector contractors no surprise good news, and worse no reason for private sector contractors to be optimistic. HMRC’s vision for a level playing field between employees and the UK’s flexible workforce continues to be deployed in the face of all arguments to the contrary. Mr Hammond continues to imply that anyone who is not taxed under PAYE is a tax dodger, and that any independent worker wanting to trade as a Limited Company is only doing so for the tax benefit. I wonder if this is a real belief or a view necessary to keep his job in a post-Brexit, post-Trump world of pragmatic politics.

 

HMRC are JAM (“Just about managing”)

“Passing the buck” is now officially written within the Autumn Statement. When policing employment status compliance gets too tough for HMRC and they end up in a JAM, they outsource the problem to the public sector supply chain (only affecting public sector contractors) and ignore advice from stakeholders telling them it will not work!

 

It’s such a pity that the Chancellor refuses to accept that the positive contribution from a vibrant flexible workforce is widely recognised by stakeholders as essential to the prosperity and economic recovery of UK plc, and therefore dangerous to ignore.

 

“Hammond and May never listen” ( I sound like Jeremy Clarkson)

Throughout the summer HMRC have “consulted” Industry experts, Accountants, Business leaders, Trade Associations and even the man on the “Clapham omnibus” searching for views and comment on key topics including: IR35 reform in the Public sector, and Making Tax Digital.

 

I wish that I could understand why HMRC are not listening. A significant proportion of stakeholder responses on both consultations are consistently negative about:

 

  • the unrealistic timetables being imposed
  • the lack of attention to detail in the implementation guidance
  • the absence of the digital tool for IR35 status assessment
  • the administrative burden being outsourced from HMRC to employers, service providers and taxpayers in an attempt to reduce HMRC’s cost of delivery
  • blanket self-justifications from HMRC of their own actions, which ignore the advice of the wider community and which do not stand up to intellectual scrutiny

 

There seems little evidence from today’s statement that smart people who work at HMRC are using their ears. A consultation process, which has merit in concept, becomes a waste of everyone’s time if consistent contributions from stakeholders across the UK are continually ignored.

 

“Hammond’s way”

So Mr Hammond let’s try it your way: Push on with the policy of forcing independent flexible workers in the public sector into a taxation straitjacket against their will, and against the will of the end hirers. Engagers (even public bodies) want control over the ease with which their business units can expand, they do not want to provide employment rights, and flexible workers are not asking for them. But to do that you will need to continue to vilify and call “tax dodgers” hardworking and proud independent workers, who are trying to put their family’s wellbeing ahead of their own.

 

Make sure that the public don’t work out that by passing the buck for determining Employment Status (because HMRC have failed to find a way to get it right) and by passing the costs of doing so on to the engager or supply chain, saves the Government plenty of cash (because I doubt you will ever find c£400m of “tax gap” that you’re looking for from contractors). Make sure also that the workers don’t blame you for the fact that their take home pay is being reduced, as the supply chain adjusts to protect its margins.

 

Proposals to remove abuse under existing flat rate VAT rules will follow in December and could affect the many innocent parties seeking fairness not abuse.

 

I am not saying that non-governmental stakeholders have exclusive access to crystal balls, but we do have ears and we use them more than you do. Your statement today affecting the contractor community is only as strong as your ability to get the implementation right. If I were to buy you and your colleagues at HMRC a Christmas present, it would be a large hearing aid. If you wanted to give independent contractors in the UK a Christmas present, just turn it on.

 

Want to know more?

Before the statement, we released our own set of predictions and wish lists on what we thought would happen and what we wanted to see announced. So were we correct? We will be sending out our full Autumn Statement review tomorrow, simply leave us your email address and we will ensure you are sent a copy.

 

cat catch the mouse

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

5 reasons the IR35 public sector consultation is one small step for HMRC

5 reasons the IR35 public sector consultation is one small step for HMRC

(One giant leap for everyone else)

 

A play on a famous quote from the Apollo 11 mission (to land on the moon) is where the similarity with HMRC’s mission (to reform the intermediaries’ legislation) ends. Neil Armstrong’s 1969 moon landing was welcomed by all. Unfortunately, the same can’t be said for HMRC’s 2016 IR35 proposals.

 

From 26 May through 18 August – roughly 85 days – HMRC will be consulting with the great and the good about the proposed public sector changes to IR35, which take effect in April 2017. Draft legislation, which will only apply to public sector bodies, will probably follow suit in the autumn. The reforms aim to transfer the burden of determining IR35 applicability from the personal service company (PSC) to the public sector body, agency or third party paying the PSC.

 

Here are five reasons why this doesn’t strike us as a good idea at Intouch.

 

1. HMRC’s IR35 non-compliance statistics are unproven

HMRC claims that a whopping 90 per cent of PSCs (20,000) don’t play by IR35 rules (they incorrectly tax themselves as being outside rather than inside IR35). HMRC estimates that non-compliance will cost the Treasury circa £400m through 2016/17.

 

But Julia Kermode, CEO of the Freelancer and Contractor Services Association (FCSA), begs to differ. She observes that, “there does not appear to be any substantiated data to support HMRC’s 10 per cent compliance claim.

 

Incidentally, the Public Accounts Committee published a report stating that, in 2013/14, PSCs complied with IR35 almost 90 per cent of the time – a wholesale reversal of HMRC’s figures.

 

In light of these statistics, Kermode believes that, “it is inappropriate to persevere with a consultation which appears to have no supporting evidence and where the rationale seems fundamentally incorrect.

 

2. IR35 proposals are unfair, irrational and illegal

Under the IR35 proposals, recruitment firms will be responsible for ascertaining the IR35 status of a worker supplied to the public sector.

 

Bizarrely, they will be held liable despite not having sight of the daily operations of the PSC or its worker (and being unable to confirm the accuracy of the information provided by the worker or the client).

 

According to the Association of Professional Staffing Companies (APSCo), the proposals are “unworkable” because they fly in the face of Article 1, Protocol 1 of the European Convention on Human Rights, which provides that tax systems must be “proportionate, reasonable, public and predictable.”

 

On this note, Samantha Hurley, Operations Director at APSCo, argues that tax law principles dictate that it’s “not reasonable to give parties obligations when they have no means of obtaining the information to fulfil them.”

 

Hurley continues her reasoning (which has been echoed by the Institute of Chartered Accountants in England and Wales): “This is clearly unjust as [recruitment firms] could end up bearing penalties attributable to other people’s lack of disclosure and conduct over which they have no control. The typical recruiter will have to assume that the contractor is inside IR35. This will result in large numbers of contractors in ‘false employment.’”

 

3. HMRC’s IR35 status tool will be inaccurate (and potentially biased)

HMRC has grand plans to devise an ‘all-knowing’ online tool, which the client will use to input information about the assignment to conclusively determine IR35 status.

 

Referring to the online tool, Dave Chaplin, founder and CEO of ContractorCalculator, has this to say: “The finest legal minds in the last 17 years haven’t been able to boil down decades of employment case law into an IR35 questionnaire that provides a binary result. How HMRC is going to achieve this in time for April 2017 is anybody’s guess.”

 

Will the tool be comprehensive enough to cater for all roles, sectors and levels of seniority (à la the current IR35)? Will HMRC be prepared to hang its hat on the tool’s results? Will Joe Public have confidence in them? In reality, the tool will need to have the wisdom of Solomon, the patience of a saint and the trust of all – an unlikely combination!

 

Current thinking in the consultation proposals is that the tool will reach a conclusion in every case: Yes or NO. Intouch is firmly of the opinion that “I don’t know” will be a popular outcome and needs to be catered for.

 

Then, there’s the intractable issue of bias. More often than not, HMRC has lost many a hard-fought legal battle centred on what constitutes an ‘inside IR35’ assignment. It would hardly be a stretch of the imagination if HMRC’s tool toes its own line.

 

Chaplin makes this very point: “The likelihood is that those who are hovering anywhere between certain pass and fail will automatically be deemed within IR35.”

 

4. Contractors’ incomes will fall or contractors will face discrimination

The upshot of the online tool, coupled with HMRC’s inherent bias, is that contractors are likely to be incorrectly put on the payroll and taxed at a higher rate than they should be. According to Deloittecontractors’ average take home pay will drop by 13 per cent if the IR35 proposals go through.

 

Worse still, recruiters may even discriminate against contractors and seek alternatives to meet their staffing needs.

 

5. Contractors will be taxed as employees, but won’t be given employees’ rights

If contractors are taxed like employees, it isn’t unreasonable for them to expect employment rights.

 

FCSA CEO, Julia Kermode, describes the proposals as “unfair, unethical and fundamentally wrong.” Kermode’s is not a lone voice in the wilderness. Chris Bryce, CEO of the Association of Independent Professionals and the Self-Employed (IPSE), says the proposals are “exploitative.”

 

Public sector first, private sector next?

In our view, the IR35 public consultation is part of a much larger HMRC strategy to encourage ‘upstream compliance,’ where taxpayers are educated to get their tax payments right the first time around, which ultimately saves time, resources and increases the ‘tax-take.’

 

As things currently stand, the IR35 proposals are confined to the public sector. But there are growing concerns that, if the proposals are successfully implemented in the public sector, it won’t be long before the Government will venture into the private sector with the same idea (despite “general resistance” by the private and public sectors).

 

So, if there’s ever a time to challenge these IR35 proposals, the time is now. After all, if the system ain’t broke, don’t try to fix it!

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.