The UK government’s draft legislation for the Finance Bill 2019 spells out HMRC’s plans to extend IR35 compliance obligations to end users in the private sector. Since its publication, familiarity and anxiety with IR35, also known as the ‘off-payroll working rules’, has escalated rapidly. Matthew Sharp, tax specialist at Fieldfisher, answers some of the questions that have emerged from greater awareness of the proposed legislation.
Is anyone exempt from IR35?
Yes.
There is a small company exemption, based on the Companies Act 2006‘s definition of what counts as “small” (i.e., two out of three of: annual turnover of £10.2 million or less; balance sheet total of £5.1 million or less; and/or 50 employees or fewer).
However, there is a specific anti-avoidance clause in the draft legislation. This seeks to stop businesses structuring themselves to avoid the legislation, or prevent businesses benefiting from the small company exemption when they should not.
Is the current political uncertainty likely to impact IR35?
The draft of the Finance Bill 2019 is working its way through parliament, so there could still be changes to the IR35 provisions before the bill comes into force (which is, as things stand, still anticipated to be April 2020).
However, the legislation is not controversial, and there is general consensus that exploitation of personal service companies (PSCs) needs to be addressed, so it is unlikely that the proposals will be scrapped.
HMRC also anticipates significantly increasing its tax receipts (c.£3.12 billion between 2020 and 2024) by reforming tax rules for off-payroll workers.
Additionally, this is not a new policy: IR35 rules came into effect in 2017 for public sector end users and next April’s changes will align the public sector with the private sector, as well as synchronising direct engagement with intermediary engagement in contractor-service user relationships.
Is there any further guidance on what the Status Determination Statement (SDS) should contain?
An SDS is a comprehensive statement from the client which:
(a) Declares a contractor’s deemed employment status (for tax purposes) following an IR35 assessment; and
(b) Provides reasons for reaching this conclusion.
There is no specific statutory guidance on what it should look like.
Lawyers can help with drafting SDSs for firms and their contractors.
In their most useful form, these tend to be one-page summaries with details of contractor engagement and evidence of the process the end user has gone through to determine the tax status of its contractors.
Lawyers can also draft status questionnaires (as an alternative to HMRC’s “Check employment status for tax” (CEST) tool), which end users can make available to their contractors and, based on the feedback provided, offer clear reasons for their determination of whether the contractor is employed or self-employed.
Involving consultants in the status determination process can open conversations about a person’s tax status in a non-confrontational way.
What are the ramifications of not providing an SDS?
Failure by a company to provide an SDS for off-payroll workers means that the company, as the end user of the workers’ services, incurs the liability for any PAYE owed on those services.
It has also been suggested that HMRC will introduce penalties on those who do not provide SDSs, although this is subject to confirmation.
What if a contractor disagrees with your assessment of their status?
If an individual disagrees with your assessment (after you have provided them with a summary of your reasoning), they are entitled to challenge your decision.
End users have 45 days from the date of challenge to respond; failure to respond means that the end user incurs full tax liability.
If a contractor leaves it until the last minute (5 April 2020) to challenge the end user’s SDS, the end user essentially has no wriggle room.
It is therefore advisable to set deadlines for contractors to respond to SDS’ that give the end user a sufficient window to respond to the challenge.
Lawyers can assist companies in devising status disagreement procedures. These can be incredibly useful.