It might pose 16 questions but the main question contractors approaching the IR 35 Consultation will ask is ‘how much of a consultation is this; really?’ and ‘how many decisions have actually been made; already?’
What is Proposed?
In essence, it is proposed that responsibility for determining the worker’s tax status will fall to the party that ultimately pays the PSC — this could be the engaging client, agency or other third party (but will be referred to as ‘agent’ hereafter). If they determine that employment exists, then they must deduct tax and National Insurance (NI) before paying the company. This will be paid directly to HMRC, along with employer’s NI, leaving no further liability for taxes for that public sector contract. In line with the new rules introduced in April 2016 travel and subsistence (T&S) would not be an allowed deduction to workers subject to IR35.
Where no deemed employment exists then the PSC would receive its money in full and pay corporation tax in the normal way.
What these proposed rules fail to account for is the effect that allowable expenses will have on the calculations. Where expenses are considered allowable by the worker and would normally be deducted from IR35 income, how will the agency make its decisions to allow a deduction before making a payment. Are agencies now going to check expenses?
So with the movement of responsibility shifting from the worker to the agent, the key is the determination of status. If that is correctly done, then the tax liabilities will be the right amount of tax. Get it wrong and we are all in a world of hurt.
This is where it gets complicated. Determination of IR35 status is complex. It is made up of the extent of Personal Service, Control, Obligation, Risk, Interaction within the organisation and the Intentions of the parties, alongside indicators of a ‘Genuine’ business. All of this is considered in the light of the contract; the industry, specific skill-set, seniority and, whether or not, on balance, deemed employment exists. These are the issues considered consistently by the tribunals and have been used historically to determine status in previous legal judgements.
The taxman expressly states that he has no intention to change the rules for how status will be determined. However, this is not what the proposals will achieve.
The proposals set out a simplified approach to determining status. Consequently, they over-simplify the tests that are to be applied and limit the test to ‘Personal service’ and ‘Control’, meaning status will be determined on a different basis for public sector contractors than for everyone else.
With this proposal, the government is being naïve to expect agents will have the necessary skills and experience readily available to accurately make these assessments. They expect decisions to be based on asking two questions, and to employ a digital tool whenever the answer to either question is not “Yes”. The digital tool isn’t available (at the time of writing) to be examined, but if it is designed to help answer the two questions alone, as the consultation suggests, then status will be tested on only Personal Service and Control and depend upon the interpretation of inexperienced and unskilled assessors.
Furthermore, the government seems to fail to understand that the actual working relationship cannot be defined or fully understood before a contract begins. Intentions versus reality can differ significantly and working relationships evolve over time. Yet the consultation does recognise the need for assessments through longer contract periods to ascertain the reality of working relationships.
Still, HMRC haven’t addressed the difficulty in assessing a working relationship before it has started and the legal and commercial ramifications of the contract wording that must be agreed from the start. We foresee circumstances where the contracted pay rates will have to be renegotiated during the contract period, where status changes, either way.
Desire to Get it Right
This transfer of responsibility clearly carries with it substantial obligation and potential risk. The obvious way to mitigate this is to automatically classify all working relationships as deemed employments, so avoiding financial risk, the need to collate information and the need to assign resources to the task. And if the taxpayer disagrees, they can always appeal to HMRC (through their complex, time-consuming and costly process).
The proposals in the consultation document ignore the impact of going through the appeals process for the worker. They also introduce a new angle to the disputing parties, as disputes will arise between the agent and PSC. In this sense, HMRC has completely disregarded the burden of their proposals on the entire supply chain. We already know that they are renowned for presenting their view of the world as being finite, even when it is flawed, so who’s to say that their digital tool won’t be just as narrow sighted and biased in their favour?
An employee or not?
The proposals state no changes are to be made to employment law – so whilst being taxed as an employee, the worker has no employment rights.
We find it surprising that if the government is so convinced that many self-employed are ‘disguised employees’ that they are not pushing for equalisation along the lines of the Agency Worker Regulations, when a deemed employment exists alongside the tax treatment.
What’s Decided is decided
So let me come to the whole issue of the consultation, which I opened this piece with. The government believes that there is widespread non-compliance with IR35 and considers this as both unfair and a significant cost to the Exchequer. It also believes that the public sector has a duty to ensure those working within it pay the correct amount of tax and NI.
While many disagree with these beliefs, and consider that the government has got its sums wrong – sometimes embarrassingly so with IR35, HMRC refuses to acknowledge that their understanding could possibly be wrong. Consulting with any organisation that has such ‘hard and fast’ beliefs sounds challenging — at best.
The bottom line, however, is that we welcome HMRC encouraging stakeholders to contribute to the development of the IR35-specific digital tool and influence the manner in which change is introduced. It’s only with them that a workable solution can be found. But we have genuine concerns that like much of the consultation process, decisions about IR35’s future have already been taken.