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Markel Tax

11 Mar 2019

Summary of HMRC’s current consultation on IR35

IR35 Consultation

On the 5th March 2019 the Government released its latest Consultation on IR35 in the private sector, which seeks discussion on refinements needed to implement the public sector legislation into the private sector. 
It seems that following last year’s consultation, the Government has listened to some of the concerns of the industry and have suggested some amendments to adapt the legislation to the private sector.
The consultation can be found here

Closing date for comments is 28th May 2019.

Key points:

  1. Small client companies will be exempt (for the most part)
  2. Decisions must be passed to the PSC (failure to do so will be penalised)
  3. The PSC will be given a mechanism to disagree with a decision (but that mechanism to be decided by the end client)
  4. HMRC are committed to improving education (CEST is here to stay)

Who will it apply to?

As mentioned in the previous consultation, the Government proposes the legislation would not apply to all businesses in the private sector.  It will seek to apply the legislation only to those engagements where the client organisation is not a small company as defined at s382 of the Companies Act 2006.
The Companies Act definition provides the following of a qualifying condition of a “small company”:
The qualifying conditions are met by a company in a year in which it satisfies two or more of the following requirements — 
1 Annual Turnover not more than £10.2 million 
2 Balance sheet total not more than £5.1 million 
3 Number of employees not more than 50 
The consultation discusses how this test might be applied to non-corporate entities and whether they should fall within the legislation if they exceed tests 1 or 3 above, or whether they need to exceed both 1 and 3 above.
It would seem this test is to be applied to the ultimate end client (the place where the services are being provided) and not the agency in the chain; however, it is less clear what happens in situations where the client of the agency and the place where the services are provided are two different corporate entities.  Logically it would seem to follow that it is the entity that holds the contract with the agency which would be judged on this test but this may not be how HMRC view it.
In addition the Government will seek to implement anti-avoidance measures to counter any arrangements designed to ensure that parties connected to, associated with, or controlled by the end client cannot take advantage of the provisions and which seek to by-pass these qualifying conditions.
Client Decision

Many commentators, Accountax included, have criticised the public sector reforms for the fact there is no right for the individual PSC to be given the client decision as to whether IR35 applies and there is no appeal mechanism open to the individual contractor where the end client makes a decision as to whether IR35 applies.
In this Consultation the Government state “While the Government believes that the existing rules have worked adequately in the public sector, responses to the previous consultation identified a small number of points that would benefit from further consideration”.
The Government proposes it would tackle these issues by:
  1. Information and transfer of liability.  Including within the legislation an obligation that the decision, and reasoning, is cascaded to all parties in the chain.  HMRC would see each party, respectively, responsible for passing the decision down the next party in the chain until it is received by the PSC. I HMRC sees the transfer of debt – along the lines of the agency legislation – as a mechanism to ensure compliance.
  2. Appeal.  Including within the legislation a mechanism where a PSC can challenge the decision made by the end client organisation. 
Information and transfer of liability

In respect of the first point, the Government is proposing that in order to “ensure compliance” the liability under IR35, which would normally sit with the fee payer, may be moved to any party in the supply chain which has failed in its obligations to pass the Decision down the chain.  This, in their view, would ensure all parties pass on the information.
Amidst these discussions, in the consultation, the Government considers also that the legislation would provide a mechanism for HMRC to pass liability to another party in the supply chain in the event that the fee payer which primarily holds the liability “ceases to exist”.  In these circumstances, HMRC proposes that the liability should transfer to the first agency in the chain (i.e. the one below the end client).  If HMRC cannot collect from that agency, HMRC would ultimately seek payment from the end client.
Whilst we can see the need to ensure compliance, and can sympathise with HMRC being unable to obtain monies from liquidated companies, we consider that this could be fraught with problems in policing and could give rise to greater fears for all parties in the contractual chain. 
Right of Appeal?

In respect of the appeals process, the Government considers that the easiest solution is “the introduction of a client-led status disagreement process”.
The Consultation does not provide any detailed information on how this process should work, but is clear that it sees the process being implemented and managed by the end client.
In our opinion, this is the most contentious issue of the Consultation and the one which will likely cause the most issues for clients, agencies and contractors alike.  This could see the “disagreement process” being different for each and every engagement depending on the process is created by each individual end client organisation.
Rather than providing clarity, we consider this will do nothing more than create more uncertainty and place all parties in the contractual chain in an impossible position.  End clients will have to implement processes and undoubtedly hire staff, or expert advice, to facilitate this measure.  Agencies will have to keep abreast of the different mechanisms by which each client operates in respect of any disagreements.  PSCs will find themselves going through a different process for every engagement with a new client.
What is of greater concern is there appears to be no intended discussion on what the parameters of this disagreement process should be?  In order to be effective, there must be some consistency otherwise we could see situations where response times could vary from end client to end client: 30 days? 60 days? 6 months…?  Moreover, at what point is the process deemed to be at an end?  After one appeal?  Two?
Whilst in our opinion the appeals process is something which fundamentally had to be addressed, this falls far short and seems a convenient, and ill-considered, side-step.
Accounting and interaction with other legislation

The Consultation continues by providing some much needed clarification on accounting principles where the legislation applies and the interaction with other pieces of legislation.  Interestingly, this legislation will take precedence over the Managed Service Companies legislation – this gives the effect that a Managed Service Company provider would see themselves primarily set aside in favour of the fee payer.
The Consultation also makes it clear that IR35 takes precedence over CIS.
The Consultation closes with assurance that HMRC’s CEST tool will be looked into and enhanced to ensure all parties have the resources they need to check their position.  This is not an assurance which fills us with any confidence…
While this Consultation addresses some of the finer points of the mechanisms of applying this legislation, what have still not been addressed are the tests for determining whether IR35 applies.  IR35 is effectively a test of self-employed status applied to a hypothetical arrangement – the Government consulted last year on the tests of self-employed status and sought views on legislating or redefining the tests of self-employed status.  The Government’s published response to this consultation (which closed on 1 June 2018) remains notably absent.  
As ever, more questions than answers.
Tagged IR35
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