Draft IR35 legislation threatens public sector car crash

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Experts are predicting a public sector car crash after the draft legislation for the public sector IR35 reforms was published today.  The draft contained amendments that could cause countless status disputes between contractors, clients and agencies.

Public sector clients are now set to assume responsibility for compliance in all instances, even where an agency is involved, with HMRC indicating that its yet to be developed IR35 status tool must be used to determine IR35 status.

The publication of the legislation comes less than two weeks after the public sector IR35 changes were confirmed in the Autumn Statement 2016. It is accompanied by a set of technical notes and a summary of responses to the consultation ‘Off-payroll working in the public sector’.

Who is responsible for IR35 compliance?

Contrary to what the original consultation said, the draft legislation now explains that public sector clients will be responsible for checking IR35 status, even when an agency is involved in the hiring process. This will be the case even when an agency is present.

Taken from the legislation’s accompanying technical notes, HMRC states:

‘The public sector client must inform the intermediary, agency, or third party with whom they have a contract to provide the services that the contract falls within the new off-payroll rules or that it does not.’

Rule change is a recipe for disaster

This change, coupled with HMRC’s promotion of its own Employment Status Service tool seems to be a recipe for disaster:

The public sector client has to determine IR35 status, and the technical notes accompanying the legislation continually reinforce the notion that they have to do so using an online tool that isn’t out yet and won’t be until at least April 2017.

With public sector contractors already engaging in contracts that will end beyond the implementation of the reforms in April 2017, HMRC has failed to suggest an alternative means of testing.

Changes put contractor/client relationship at risk

Although the taxman is confident in its own abilities, there is still scepticism amongst stakeholders that its tool will align with case law and be able to provide an accurate and definite judgement.

HMRC’s summary of consultation responses claims “the tool will be based on case law” and will be able to provide “simplicity and certainty from day one of the contract”.

However it seems far more likely that HMRC will consider a contractor caught where there isn’t 100% proof that they have passed. The likely outcome is then contention between contractor and client.

Contractors are already dubious about HMRC’s tool. The likelihood in many instances is they will want to contest its judgement. In which case, HMRC is suggesting that contractors accept the contract inside IR35, and then appeal the decision at a later date. 

Ultimately, it looks like these public sector bodies are being strongly encouraged to use this tool which is likely to say that most contractors are within scope of the rules, and the public sector bodies are going to be in a position where they can’t do anything about it.

HMRC attempting to achieve the impossible

Despite HMRC’s position, the fact that IR35 is based on decades of complex case law means no IR35 status test could ever provide a binary yes/no result.

Perhaps one way to look at it is through this interesting analogy posited by a leading voice in the contracting sector. 

“If you consider being in the centre of London a strong pass, then moving further away you can still pass, until you end up shooting up the M1, being borderline around Birmingham, to a definitive fail if you end up standing in the centre of Leeds.  The HMRC tool is a bit like saying that unless you are stood within 500 metres of the centre of London in Trafalgar Square, then you aren’t officially in London.”

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