HM Treasury published their long-awaited review into the implementation of IR35 reforms in the private sector this week with a commitment to the “soft landing” that chancellor of the exchequer Rishi Sunak hinted at last weekend in Birmingham.
The document confirms that HM Revenue & Customs will not charge penalties to taxpayers who get the new Off-Payroll rules wrong in the first twelve months following their implementation, except in cases of “deliberate non-compliance”. This will likely be of little significance to business, however, whose concerns relate more to the unpaid tax liabilities in the event a self-employed contractor is later assessed by HMRC to be a disguised employee, rather than the penalties that would be applied on top.
The review contains five other adjustments to the policy, with the most impactful being a change to the rules that will create a legal requirement for small companies, who are exempt from the rules, to declare their small company status upon request from contractors and recruitment agencies in the supply chain. There had previously been concerns that small companies could attempt to conceal their exempt status.
Other changes include a confirmation of an earlier announcement that the rules will only apply to services performed, rather than payments made, after the April 6 implementation date; a pledge by HMRC not to use data received under the new regime to open historical IR35 investigations; issuance of guidance, already published, on the new rules; and a factsheet for contractors to support contractors preparing for the changes. The legislation will also be updated to put beyond doubt that offshore clients will not fall under the new regime: IR35 will continue to be applied as it has to date.
The response to the review from the contractor sector was unenthusiastic at best. Andy Chamberlain, deputy director of policy at the Association of Independent Professionals and the Self-Employed (IPSE), said: “The tweaks proposed by the review go nowhere near far enough. If anything, this tinkering shows the government knows the changes to IR35 will be immensely disruptive to business and contractors, but plans to forge ahead regardless.”
Sophie Wingfield, director of policy at the Recruitment & Employment Confederation (REC), who have lobbied for a delay to the implementation, said: “Taking a ‘light touch’ approach to enforcement in the first year will create more problems than it solves.
“What’s obvious from this is that the Treasury know IR35 is not quite right.”
Graham Jenner, of Jenner & Co contractor tax advisers, agrees that the absence of penalties in the first twelve months will do little to assuage the anxieties of business. “A light-touch on penalties for 12 months does nothing to address the underlying concerns.
“Stakeholders main concerns [are] that end-clients are running scared and banning the use of PSCs, affecting the livelihoods of tens of thousands of contractors.”
Dave Chaplin, chief executive of freelancer website ContractorCalculator, said: “The art of taxation is supposed to be about plucking the goose with the minimum amount of squawking. You’re not supposed to kill the goose.”
The new rules will affect around 230,000 contractors working the in UK. The Treasury acknowledged that there has been significant growth in self-employment and owner-mangers in recent years, but repeated earlier statements that non-compliance with IR35 is widespread and that, if left unchecked, IR35 avoidance would cost the exchequer £1.3 billion per year by 2023-24.
“This is not sustainable. It denies the taxpayer significant revenue for essential public services and perpetuates an unfairness between two individuals working in the same way, but paying different levels of tax,” states the review.
The government’s Good Work Plan of 2018 suggested that legislation may be brought forward to “make it easier for both the workforce and businesses to understand whether someone is an employee, worker or self-employed – determining which rights and tax obligations apply to them”, but this has not yet materialised.
The strategy instead seems to be to place the burden of applying the existing extremely complex IR35 criteria – which have been derived from historical tax and employment tribunal cases – on to the hirers of contractors. Many are concerned that the additional administrative burden will put businesses off using contractors altogether, and many major end-clients have already said they will stop using limited company contractors post-April, particularly in the financial services sector.
HMRC’s Off-Payroll contractor factsheet can be found here.
28th February 2020.
