HMRC’s proposed IR35 status tool
Last month, Intouch Accounting’s MD Paul Gough shared his thoughts on HMRC’s proposed IR35 status tool within the public sector. In this article he drew attention to the weaknesses in HMRC’s proposals and discussed the likely implications which HMRC appear to have neither fully considered nor understood.
As we wait for the outcome from the consultation phase, we read with interest the recently published response from the Office of Tax Simplification (OTS) in regards to the consultation document.
Who does the OTS side with?
The contracting community. The OTS believe the proposals will add unnecessary complexity to the already confusing subject of IR35. In particular, they believe it will:
- increase administrative burden, as more information will be needed in order to help determine a contractor’s IR35 status
- create boundary issues between the private and public sector, as the test’s final decision may not be binding and therefore lack certainty
- the OTS have previously encouraged the use of a digital employment status tool, but now warn that a tool could only ever simplify the current process if, clear and easy to follow rules and regulations will show (without question) an individual’s working status
- require two versions, to allow for different circumstances and businesses
- finally, need to be updated on a regular basis
The Public Sector
It would be unfair to subject all contractors to these changes, without explaining in detail how their sector is affected and whether they should be operating within the proposed rules.
There’s also the ongoing concern that by enforcing such rules they will create an imbalance between private and public sectors. This in turn would make it harder for the public sector to hire contractors with specialist skills.
Protection for the engagers
There must be enforced protection for engagers who can demonstrate that they have taken all reasonable steps to obtain reliable information from the other parties in the supply chain that should have supplied it, but for whatever reason have not done so.
The OTS believe that should a contractor fall ‘inside’ IR35, the 5% deemed payment allowance should be eliminated, as it adds unnecessary complexity for the engager. Instead, the PSC should claim it separately.
If a contractor is found ‘inside’ IR35, then there should be no VAT implications. It is unfair for HMRC to make a PSC pay employer’s VAT whilst being forced onto the payroll.
Tests and the online tool
Parts one and two of the test (before progressing to the online status indicator) do not show conviction, as the decision is not final. The OTS believe that even if the first two parts did show conviction, it still may not apply as it does not allow wiggle room for any changes to the contract, which the engager / contractor may not be aware of.
Materials for the job
The majority of contractors and freelancers provide services which are predominantly knowledge based. If 20% or more of a contract is for materials which are wholly consumed in the services required to complete the contract, then it is automatically deemed to be ‘outside’ of IR35.
There are very few circumstances whereby Limited Company contractors, (such as those who specialise in the IT or finance sector for example), would use 20% of materials to complete a contract and therefore cannot be classed as ‘outside’ under this rule.
Personal service and control
If the 20% test is failed, the engager must then move onto the second part, two questions on personal service and control questions. Should these two questions deliver a positive answer then IR35 will apply. If the engager is unable to answer ‘yes’ to both of these questions, they will then have to progress onto using HMRC’s online status tool.
Attempting to rely primarily on personal service and control tests to determine a contractor’s IR35 status is simply not appropriate for the majority of highly skilled contractors and freelancers. Whilst a highly skilled contractor may not be able to send another contractor in their place, this does not provide a definitive indication of their employment status.
HMRC should also consider the fact that for some contractors, especially those who work within the public sector where security is an issue, that sending a substitute to complete their work is simply not an option.
For skilled workers, the ‘control’ aspect of the test does not always give a clear-cut answer for whether the contractor is a disguised employee or not. Many stakeholders are of the opinion that such a test is more relevant for the lower skilled flexible workforce, where more direct oversight and control over how the work is performed is more common.
The OTS believe that unless the coding for the status tool is based on new employment status case law, then it will be considered biased in HMRC’s favour.
The OTS completely agree that any tax rules should be supported with financial penalties and interest, but that it must be fair. The rules and procedures must therefore be easy-to-follow, to allow the engager to operate correctly and to avoid penalties.
The consultation period outcome
Whilst the exact date for the consultation outcome is still unconfirmed, Intouch will be reviewing it as soon as it’s published, so ensure you’re following us on social media and be first to get all the information and support you need.
Worried about how the proposed changes to IR35 could affect you? Our team of expert Personal Accountants are on hand to offer Intouch clients bespoke advice and support, that’s tailored to their circumstances and future contracting goals.
If this sounds like the type of specialist support you need as a serious contractor, why not get in touch? We look forward to speaking to you.
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.