HMRC Guidance on IR35 Reform
Latest HMRC guidance on private sector IR35 reform disappoints
Expectations that HMRC would make serious efforts to help recruitment agencies and end-clients implement incoming IR35 reform fell flat last week, as the taxman published its latest guidance to the off-payroll working rules.
From April next year, changes to IR35 in the private sector will see the responsibility for setting IR35 status shifted from the contractor to medium and large businesses, with the recruitment agency picking up the IR35 liability when they operate as the fee-payer.
Similar changes were introduced in the public sector in 2017, and by all accounts have not been a success. Still, to this day, contractors are being placed inside IR35 by organisations that are focused on protecting their liability to the point where they automatically place all contractors inside IR35.
Needless to say, any genuine support offered by HMRC in the lead up to private sector IR35 reform will be welcomed. But what was once promised by the taxman has not materialised. Not yet anyway.
The high level of concern regarding IR35 changes among all parties involved spurred HMRC to commit to providing additional help. This was shown when immediately after the 2018 Budget, in which private sector reform was announced, the Government issued a statement that pledged the following:
“HMRC will provide extensive support and guidance to help businesses implement the off-payroll working rules to ensure they apply them correctly and will ensure the guidance is appropriate to the needs of the private sector, which are more diverse than those of the public sector.”
However, what emerged from HMRC on 15th April on the Government website, was one page of guidance notes that arguably fail to offer the agencies and end-client all the information they need.
Under the heading “Prepare for changes to the off-payroll working rules (IR35)”, HMRC is advising end-clients and recruitment agencies identify contractors who supply their services through personal service companies and determine if the off-payroll rules apply by using HMRC’s very own IR35 tool, CEST.
They are then advised to talk to contractors about whether the tax applies to them and to put “processes” in place to determine tax status before making the appropriate payment, should the contractor be deemed inside IR35.
And that’s about it. HMRC only saw it fit to write around two hundred words of guidance despite the fact the public sector has struggled to get to grips with IR35 reform and there is less than a year to go until similar changes are rolled out in the private sector.
While clarity and crispness is a virtue in any guidance given by the Government, we’re left to wonder why such lightweight information is on a change that could have such heavy duty consequences.
Contracting has had a hugely positive impact on the UK employment landscape and any taxation policy that discourages talented people to take this career route is seen by many as a backwards step. Especially in a country determined to achieve growth in industries that depend on the flexibility of the workforce.
Currently, there is no statement on the HMRC website about further support that might or might not be offered in time.
Both recruitment agencies and end-clients must be wondering if this is it. Was the promise of “extensive support and guidance” an empty one? For agencies, in particular, the answer is very important given that from April 2020, they will carry the IR35 liability when they are the party that pays the contractor.
As we’ve seen recently, IR35 cases can carry backdated taxes, penalties and interest that can amount to well over £1million. Therefore, it goes without saying that recruiters would be wise to help end-clients make accurate IR35 decisions to protect their bottom line. Additionally, contractors are much more likely to source projects through agencies that prioritise well-informed IR35 assessments over risk-averse ones.
With the countdown to further reform well and truly on, agencies have a great deal of self-interest in educating end-clients on the topic of IR35 – a tax they were not liable for until 2017 in the public sector.
Judging by HMRC’s latest IR35 guidance it looks like it’s also within recruiter’s and end-clients’ own interests not to rely on the Government for help when successfully implementing changes on the horizon.