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Markel Tax

02 Jul 2019

IR35 Consultation: Our Response

The focus of the latest IR35 Private Sector consultation was on the mechanisms of the legislation and the Government’s attempt to address some of the criticisms of the proposals.  We provided our response to the consultation and provide a copy of those responses here for our clients.   The consultation itself can be found here.

The following responses are provided by David Harmer of Markel Tax (formerly Accountax) based on our significant experience in dealing with IR35 and we have canvassed opinion from a variety of our clients including PSCs, Agencies and end-clients.
 
Question 1 – Do you agree with taking a simplified approach for bringing noncorporate entities in to scope of the reform? If so, which of the two simplified options would be preferable? If not, are there alternative tests for non-corporates that the government should consider? Could either of the two simplified approaches bring in to scope entities which should otherwise be excluded from the reform? Is it likely to apply consistently to the full range of entities and structures operating in the private sector? Please explain your answer.
 
In order for the legislation to operate equitably across the board, the requirements applying to incorporated and unincorporated entities must be aligned as closely as possible.  Option 2 provides the closest alignment of the two.
 
Question 2 – Would a requirement for clients to provide a status determination directly to off-payroll workers they engage, as well as the party they contract with, give offpayroll workers sufficient certainty over their tax position and their obligations under the off-payroll reform? Please explain your answer.
 
One of the problems with the public sector legislation is that the individual to whom the decision applies does not automatically receive a copy of the decision issued by the decision maker.   If the decision maker, under this legislation, is required to provide the individual with the decision and reasoning then this provides the individual with the information by which his tax status has been determined.  Which can only be the correct approach so as to allow transparency throughout the contractual chain.  Whether this provides the individual with “certainty” over his tax position is another matter, and relies upon the accuracy of the decision (ie. the capabilities of the decision maker in arriving at its decision).
 
Question 3 – Would a requirement on parties in the labour supply chain to pass on the client’s determination (and reasons where provided) until it reaches the fee-payer give the fee-payer sufficient certainty over its tax position and its obligations under the offpayroll reform? Please explain your answer.
 
This would depend on how the information flow is legislated, and dependent on the outcome of question two above.  Is the onus placed on the decision maker to pass the decision down the chain until it reaches the fee payer?  Or is the onus placed on the PSC worker to deliver the decision it has received to the fee payer?  One would suggest that the information should flow from the top down and not placed on the PSC worker.
 
Question 4 - What circumstances may result in a breakdown in the information being cascaded to the fee-payer? What circumstances might result in a party in the contractual chain making a payment for the off-payroll worker’s services but prevent them from passing on a status determination?
 
This would likely only happen if the parties in the chain are not passing the information down, or if there is some misunderstanding of who in the chain is the fee payer/decision maker.
 
Question 5 – What circumstances would benefit from a simplified information flow? Are there commercial reasons why a labour supply chain would have more than two entities between the worker’s PSC and the client? Does the contact between the feepayer and the client present any issues for those or other parties in the labour supply chain? Please explain your answer.
 

There are numerous commercial reasons why there may be two or more parties between the decision maker and the fee payer.  Decision makers may outsource to specialised agencies who in turn engage other agencies/companies to source suitable candidates.  It is a commercial reality in many industries including construction, engineering, IT etc. where there is a shortage of experienced trade.  Legislation should not be a bar to commercial relationships.  
 
Question 6 – How might the client be able to easily identify the fee-payer? Would that approach impose a significant burden on the client? If so, how might this burden be mitigated? Please explain your answer.
 
The end-client is already burdened significantly with ensuring it has determined the tax status correctly.  This is a wholly unnecessary step which not only adds additional burden to an already burdened party in the chain but has the potential to derail sensitive commercial relationships with other parties lower down the chain.
 
Question 7 - Are there any potential unintended consequences or impacts of placing a requirement for the worker’s PSC to consider whether Chapter 8, Part 2 ITEPA 2003 should be applied to an engagement where they have not received a determination from a public sector or medium/large-sized client organisation taking such an approach? Please explain your answer.
 
This is not “placing” a requirement on PSCs.  PSCs already consider the applicability of the IR35 legislation and are best placed to make that decision either for themselves or with assistance from specialist tax advisers/accountants.  The specialist knowledge is already with this end of the contracting chain.
 
Question 8 – On average, how many parties are in a typical labour supply chain that you use or are a part of? What role do each of the parties in the chain fulfil? In which sectors do you typically operate? Are there specific types of roles or industries that you would typically require off-payroll workers for? If so, what are they?
 
The IR35 legislation has been in existence since 2000.  HMRC must have gathered a significant amount of information in respect of supply chains and must surely already have adequate information.  The number of parties in a “supply chain” may vary from industry to industry and end client organisation to end client organisation.  In any event it should not matter how many parties are in a supply chain as long as the “decision maker” and “fee payer” are defined with sufficient clarity so that any party in between the two understands their responsibilities to pass the information across correctly.
 
Question 9 – The intention of this approach is to encourage agencies at the top of the supply chain to assure the compliance of other parties, further down the chain, through which they provide labour to clients. Does this approach achieve that result?
 
This would appear to achieve the “expectations”.  This approach, however, places the agency at the top of the chain in the position of, effectively, policing the compliance of those parties below it in the chain (which could be numerous).  This would seem a disproportionate measure and seems to presume  a lack of compliance by those further down the chain.  This could lead to numerous, unnecessary legal challenges.   We have not seen any occasions where this has occurred with the Public sector legislation, this seems to be contemplating widespread non-compliance?
 
Question 10 – Are there any potential unintended consequences or impacts of collecting the tax and NICs liability from the first agency in the chain in this way taking such an approach? Please explain your answer.
 

If this measure is to be implemented it would almost certainly need to be accompanied with a defence for agencies to be able to rely on the information provided to it, otherwise the agency could be liable to tax and NI when it has acted entirely correctly but relied upon information it did not know to be false.
 
Question 11 - Would liability for any unpaid income tax and NICs due falling to the client (if it could not be recovered from the first agency in the chain), encourage clients to take steps to assure the compliance of other parties in the labour supply chain?
 
This may, undoubtedly, “encourage” the end-client to carry out further policing of its supply chain, however it could also encourage end-clients to outsource their operations entirely or simply issue a policy of not utilising PSCs.  The main focus of the legislation should be compliance with the IR35 legislation and not encouraging end-client organisations to avoid PSCs.
 
Question 12 – Are there any potential unintended consequences or impacts of taking such an approach? Please explain your answer.
 

As mentioned above, these measures could lead to many end-clients/agencies taking a decision not to contract with PSCs.  It would seem the government is focused on widespread misuse/non-compliance.  We are not aware of such widespread non-compliance.  The measures should be proportionate so as not to act as a bar to contracting.  
 
Question 13 – Would a requirement for clients to provide the reasons for their status determination directly to the off-payroll worker and/or the fee-payer on request where those reasons do not form part of their determination impose a significant burden on the client? If so, how might this burden be mitigated? Please explain your answer.
 

The requirement should simply be to provide the decision with the reasoning (without the PSC having to request the reason).
 
Question 14 – Is it desirable for a client-led process for resolving status disagreements to be put in place to allow off-payroll workers and fee-payers to challenge status determinations? Please explain your answer.
 

The main problem with this approach is that the resolution process will vary from client to client.  Ultimately each client will have their own methods and timescales within which they resolve any disagreement, this could lead to protracted processes and uncertainty for many PSCs.    It should not be that a PSC worker’s certainty of his tax affairs is dependent upon which end client the services are being provided to.  If the “appeal” process is to be placed in the hands of the end client then the government must provide some basis of uniformity.
 
Question 15 – Would setting up and administering such a process impose significant burdens on clients? Please explain and evidence your answer.
 
Ultimately yes.  HMRC has stated on many occasions the significant resources and time required to determine whether IR35 applies and timescales involved in taxpayer appeals.  The end client will have to invest in specialist advice and resources to provide an adequate resolutions process.
 
Question 16 – Does the requirement on the client to provide the off-payroll worker with the determination, giving the off-payroll worker and fee-payer the right to request the reasons for that determination and to review that determination in light of any representations made by the off-payroll worker or the fee-payer, go far enough to incentivise clients to take reasonable care when making a status determination?
 
As mentioned above, the reasoning should be provided automatically along with the “decision”.
 
Question 17 – How likely is an off-payroll worker to make pension contributions through their fee-payer in this way? How likely is a fee-payer to offer an option to make pension contributions in this way? What administrative burdens might feepayers face which would reduce the likelihood of them making contributions to the offpayroll worker’s pension?
 
Pension contributions is a personal decision for the individual.  It varies dependant on the age, relationship status, lifestyle, personal circumstance etc of the individual concerned.  No one standard answer can be provided.
 
Question 18 - Are there any other issues that you believe the government needs to consider when implementing the reform? Please provide details.
 
Prior to implementing this reform the government needs to address:
 

  1. The Employment Status consultation.
The consultation was issued on 7 February 2018 and it closed on 1 June 2018.Nothing has been published since.
 
If any changes are made to the law on Employment Status then this will mean that the tests for determining whether or not IR35 applies will change.End-clients will need to ensure they are using the correct tests for the determination of IR35 and will need significant time and specialist advice to ensure they are applying the correct law.If the government intends to legislate existing case law principles or implement new “test” then this should be done first, otherwise end-clients will have to re-invest in additional time, money and resources when the law on Employment Status changes.

   2.  HMRC advice and CEST tool. 

The government stated that HMRC would invest in improving its guidance.To date HMRC published opinion does not accord with case law authority (in particular Mutuality of obligations).To date there has been no significant change in the CEST tool - It still fails to address mutuality of obligation and both the control and personal service questions are not sufficiently clear to the majority of contractors.
 
If the decision to decide whether IR35 applies is to be placed in the hands of private companies then they should be able to rely on the government for guidance and accurate advice.Clients will need time to prepare for the implementation of the legislation and need access to this information well in advance.
 
We are already working with a number of clients on due diligence and potential insurance to safeguard against liabilities and we understand the draft legislation is due to be released on the 11 July 2019.  As always the devil will be in the detail and we will provide a full analysis once we have had time to thoroughly examine it. 

For any more information please contact us on 03450 660 035.
 
Tagged IR35
Next article in series

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Self-employed carers