For most of this year HMRC has insisted that the IR35 reforms, extending and modifying the IR35 public sector rules so that they apply to all but small private sector companies, will proceed as proposed. These rules switch tax obligations and therefore risk onto hirers and the agencies supplying them. That has meant that companies involved in engaging with personal service company contractors have been forced to review and change policy, from top level governance policy down to on boarding administrative procedures.
Given that HMRC’s proposals were to implement the new regime on 6th April 2020 we, along with virtually every adviser in this sector, have recommended early preparation. However since all of the major political parties have now announced that they will review the reforms what should everyone do?
First of all let’s put this into context. There have been calls for review of IR35 for donkey’s years and alternative ideas to tackle the tax avoidance claimed by HMRC have been put forward time and again. There has been consultation after consultation since early 2016 concerning the scheme for the public sector, and again for the extension of the scheme to the private sector. We have never been told why the many constructive comments and warnings have been repeatedly rejected. For example, we proposed a payment on account be made by the hiring client or agency, similar to the scheme that has successfully existed in the construction industry for very many years. We suggested the status test should be based on real business criteria rather than the current complex employment status tests. All to no avail.
Whilst the promise of a review is welcome, what could it involve? Particularly, what approach will the Conservatives take given that the plan and the rejection of all alternatives have been on their watch?
Will it be the CEST tool, which is never going to be fit for purpose because it cannot make objective assessments, review contracts or have the flexibility to give an accurate and definitive position that can be fully relied on by all parties? Probably not, given its latest iteration has only just been published and the review anyway is of IR35 itself. Will it be the outdated and outmoded employment status tests, that require case by case assessment and generate nothing but uncertainty? Again probably not, since the whole knotty issue of employment status is based on case law not statute, and anyway the government has seemingly done little about it since the Matthew Taylor Review. Will it be the overall approach, which relies upon these ambiguities to generate fear of tax investigations and claims years down the line, as the motivator for change? Again, this is unlikely. HMRC’s assumption that non compliance exists because the contractor has been the decision maker may be right.
So what can we expect? Surely the fact that HMRC loses one case after another is evidence that all is not well at the mill? Would it not be better to have clear, concise rules that everyone can follow?
This would entail a review of the central IR35 theme that PSC contractors are nothing other than disguised employees. Once this is looked at properly perhaps the realisation will dawn that the current measures unfairly tax real businesses. Many contractors have real businesses and accept risk, overhead and liability in a host of ways that employees never will. This begs the question, are the authors of IR35 entirely off track? Is there not a case for a new, positive and clear approach setting out business taxes in a way that all can understand and is fair? After all, tax avoidance depends on ambiguity, the very thing that IR35 created from the outset.
So what now? Some businesses of course may plough on with their preparations on the basis that no one political party will want to drop the prospect of significant income tax and national insurance receipts from what is seen as a measure to stop tax avoidance; after all the promise to review is not a promise to scrap. But inevitably many will probably elect to wait and see what happens, accepting that delay could cause difficulties if the April target in current form goes ahead.
What is crippling recruiters and hirers is the lack of certainty. Therefore we ask for guidance at the soonest possible opportunity. If there is to be a review, what is the scope of it, who will undertake it and critically when can the result be expected? Is the April 2020 target to be maintained? More importantly we ask that the review should be scrutinised independently and with full transparency.