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IR35: HMRC sticks to original proposals in draft legislation

Written by FCSA Business Partners, Larsen Howie

HMRC has published the Summary of Responses to the consultation ‘Off-payroll working rules from April 2020’ (our response to which you can read here) but it appears that, as with many HMRC consultations, this is another fait accompli. We shouldn’t be too surprised, however, because HMRC had convinced itself that the public sector blueprint has been a success and are imposing it on the private sector, with some appropriate tweaks.According to the Revenue, based on 12 months’ worth of PAYE and NIC receipts, an additional £550M has been raised as a result of the rules being applied in the public sector.

Who will be affected by the private sector IR35 reform?

According to HMRC, the following will be affected by the extension of the off-payroll rules from April 2020:• 170,000 contractors being deemed disguised employees. Typically, there is no explanation as to how HMRC have arrived at this figure;
• Up to 60,000 client companies who engage freelancers; and
• Approximately 20,000 agencies.

Brazenly, the Revenue states that there will be ongoing savings for around 230,000 PSCs due to them not having to self-assess their IR35 status or associated accounting burdens. What parallel universe are HMRC operating in when they think it worthwhile to make this point when the contractor will be suffering PAYE tax and NIC deductions?

Private sector engagers
The Companies Act test for corporate organisations received favour amongst respondents to the consultation (there were over 200 written responses). For unincorporated businesses, a simplified test will apply whereby those with a turnover exceeding £10.2M for a calendar year will be within the scope of the off-payroll rules. The test will apply for the tax year following the calendar year in which the businesses turnover tips £10.2M.
Where companies cease to be small, and therefore come within the scope of the off-payroll rules, the rules will only take effect from the start of the tax year following the filing date. After this date, it ceases to qualify as a small company under the Companies Act 2006, i.e. exceeding two or more of the following limits:
• Annual turnover not more than £10.2M
• Balance sheet total not more than £5.1M
• No more than 50 employees

Employment status IR35 decisions
HMRC apparently disapprove of blanket assessments, be they inside or outside of IR35. That’s the official line of course, but I doubt they would kick off and intervene where an engager was taking a risk-averse approach and payrolling large swathes of contractors. Anyway, they haven’t actually seen any evidence of blanket determinations being made in the public sector! There’s that parallel universe again – the rest of us know this has happened!

Clients (engagers), who are medium or large-sized companies, will be required to pass the IR35 status determination and the reasons for their decisions down the contractual chain, as well as to the contractor directly. This information will be contained within a valid Status Determination Statement. Evidence arising out of responses to the consultation suggest that labour supply chains are generally robust enough to ensure that information can be passed through effectively.
The simplified approach whereby the fee-payer would receive the IR35 determination directly from the client was rejected due to practical difficulties associated with the engager actually being able to identify the fee-payer.

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