Aspire at the HMRC ‘Off-payroll working rules form April 2020’ roundtable event

Rhian Lloyd, Senior Manager at Aspire Business Partnership, attended a HM Revenue and Customs (HMRC) roundtable discussion on 16 April 2019 regarding the “Off payroll working rules” consultation which was published on 5 March 2019 (“the consultation”).

HMRC were seeking views from a range of attendees at this roundtable event (which was 1 of approximately 10 being held) in relation to the consultation and HMRC’s proposals contained therein. HMRC summarised that 9 out of 10 Personal Service Companies (‘PSCs’) do not comply with the current IR35 rules contained within Chapter 8 of the Income Tax (Earnings and Pensions) Act 2003. Some would say that perhaps HMRC should have provided more assistance to PSCs and their advisors/accountants so that the legislation implemented in 2000 was successful and HMRC didn’t sanction such non-compliance.

New Legislation and Guidance

We were told that the legislation will be published on “L DAY” which is due to be in July, but there was no date set yet. I anticipate that this will look similar to the existing legislation which already governs the off payroll rules in the public sector. It will be contained within the Finance Bill at Budget ready for implementation in April 2020.

HMRC stated that they will be publishing guidance in “tiers”. There will be basic guidance with a background on the new legislation and what each entity in the supply chain needs to do (i.e. fee payer, engager, intermediaries), “how to do” guidance and then more technical guidance.

CEST

HMRC made it clear that they wanted to focus on the consultation during this event and would not be dealing with comments on CEST. I assume (and hope) that they will be consulting on this with stakeholders separately as it is a large project in itself. I sincerely hope that they will not be updating CEST without any communication with stakeholders that use/will be using the tool and without taking into account the numerous IR35 cases that HMRC has been losing in court… We will have to see what further guidance and publications HMRC produce surrounding CEST as we get nearer to April 2020.

HMRC commented that the IR35 cases that they have been losing, or in HMRC’s words, that they have “not won all of”, were “finely balanced”. It is significant that neither specialists within HMRC nor solicitors have been able to make correct decisions regarding the status of an individual under IR35, yet End Users will now be expected to do so. How is this possible? It will be time consuming, costly and burdensome for End Users to make decisions which is likely to ultimately lead to “blanket decisions”.

Small Company Exemption

HMRC were particularly interested in thoughts surrounding the small company exemption which has been proposed for the extension of off payroll rules into the private sector.  Despite the feedback provided, I would assume that this will be implemented on the basis that Ministers have already announced that small companies will not be affected.  This  removes 1.5m employers from having to make a decision. In the main, attendees took a strong view that this exemption would complicate matters more, particularly for growing companies or companies on the verge of the small company definition on the basis that they may not be aware of the off payroll rules and one day, unknowingly, they will be required to consider them and make a status determination.

Reportedly, HMRC found that only 34% of businesses that took part in a survey were aware of the new corporate criminal offences under the Criminal Finances Act 2017 which have been in effect since September 2017. Without HMRC undertaking extensive communicational exercises and educating businesses, it will be exactly the same scenario for the off payroll rules in the private sector.

The Chain of Communication

It was made clear to HMRC that it would not be feasible for an End User to provide the status determination and reasons for that determination to the worker direct. Therefore, I am hopeful that HMRC take this on board and do not implement this proposed change. Instead, it was agreed that their suggested approach of passing the determination and reasons behind it down the contractual chain be adopted, which I brought to HMRC’s attention at the roundtable event on the same topic that I attended in July 2018, as well as any liabilities resting with the entity who fails to pass the message on.

Other concerns included;

• PSCs are concerned that April 2020 will automatically trigger HMRC compliance activity if they have treated themselves as outside IR35 historically, but post-April 2020 they are deemed as inside IR35.
•  The new legislation is proposed to apply to the first payment on or after 6 April 2020, however, there needs to be clarification as to whether this applies to payment on or after 6 April 2020 is in relation to a pay reference period before this date. For example, a PSC may receive payment on 10 April 2020 for the Pay Reference Period 30 March to 5 April 2020.
•  PSCs typically quote a price that is all inclusive of labour and expenses. If these PSCs are deemed inside IR35 then they will be taxed on the gross amount (that includes expenses) and so, they could be paying more tax than an employee.
• PSCs lose 5% tax relief that was introduced to alleviate the cost of running their own business. They may increasingly be seeking advice and support with the introduction of this new legislation.
• HMRC stated there should not be any employment status changes pre April 2020 and acknowledged it is unfortunate that this is running alongside this reform. They confirmed that the Taylor review / Good Work Plan outcomes on employment status may change CEST.
• End Users were particularly concerned about challenges from PSCs in relation to the determination that they make, as well as the likelihood of financial liabilities and penalties if they make the wrong status determination and what would constitute reasonable care having been taken. Also, as the Fee Payer is typically the responsible entity for PAYE and NIC, how would they know that reasonable care had been taken by the End User to make the decision?
• HMRC consult on the potential for Fee Payers to provide the ability for PSCs to make personal pension contributions. Whilst this would work similarly to a salary sacrifice mechanism and provide Employer’s and Employee’s NIC relief and tax relief, attendees provided feedback that HMRC need to make this clear from day one on the basis that Fee Payers will be making changes to payroll systems and need to know if pensions is another area for consideration.
• HMRC states that the IR35 reform in the public sector demonstrated that 50% stayed and were not caught by the IR35 rules. Attendees posed the thought that it is more likely that HMRC has not yet conducted its investigations into engagers of PSCs and it may be that the 50% should be inside IR35 in HMRCs view!
• The cost of labour supply will be higher if Employer’s NIC need to be considered. This will ultimately be passed up the supply chain to End Users.
• There will be increased Employment Tribunal claims in relation to status determination challenges, this will be costly for Fee Payers and End Users to defend.
• It was suggested that HMRC introduce a new tax for PSCs as a payment on account to HMRC, similar to CIS. I do not believe this will happen for one second on the basis that this was not HMRC’s remit. Instead they were tasked to make IR35 work in the way that was intended in 2000. Also, HMRC would not receive Employer’s NIC or higher Apprenticeship Levy payments.

See my previous blog on a roundtable event attended in July 2018 here.

See our news on the consultation published on 5 March 2019 here.