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Off-Payroll Working in the Private Sector

Written by FCSA Business Partner, My Digital Accounts.


What is the latest on IR35?

IR35 has been a hot topic in the news over the last few weeks due to a new consultation announced on the 18th of May.

The closing date for responses of mid-August is nicely timed for the Autumn Budget leading many in the industry to believe this demonstrates HMRC’s intent to roll out the legislation into the private sector in 2019. Our recent article on the subject predicted this.

Recent IR35 cases have indicated that tribunals have a different interpretation than HMRC:

  • Mr Daniels for MDMC Ltd. Entered into a contract with Recruitment Agency Solutions who provided his construction services to Structure Tone Ltd. The case was brought to a tribunal for breaching IR3 However, the tribunal determined for Mr Daniels due to the fact that he was not entitled to employment benefits and therefore would not have been an employee.
  • Jensal Software Ltd (JSL) recently successfully defended against a HMRC judgement (with the support of Qdos). The main strengths of the case were surrounding control and it was clear that JSL did have control over the services, much more so than would be afforded to an employee and had a genuine right to substitution supported by Capita Resourcing (the agency through which JSL had obtained their contract).

A summary of the consultation document

The document considers the effectiveness of the off-payroll working in the public-sector reforms introduced in April 2017 and, unsurprisingly, concludes that the new rules have been “effective in reducing non-compliance” (Para 4.9). There is even some independent research which implies concerns have been merely “anecdotal” (Para 4.10)

It should be noted however that this conclusion seems to be inconsistent with FCSA’s own research stating that “HMRC has failed to communicate effectively with 50,000 public sector bodies so to roll the reforms out to 5.5m private businesses in the UK will require a massive upscaling of current policy implementation which HMRC is simply not equipped to do”, believing that a number of tax policies produced have been put in place to penalise the contingent workforce. Ultimately, FCSA disagrees that public sector compliance has improved since the reforms were implemented. They say that an increase in numbers on payroll does not mean improved compliance, it just means public sector bodies have determined contractors inside IR35, which is unlikely to be correct in every instance.

Where is the consultation heading?

Over recent years, HMT ‘Consultations’ have developed into simply “flagging up impending legislation”. There are several indications that this will be the case with the extension of the off-payroll rules:

  • The short timescale for responses;
  • The explanation in Chapter 5 that currently “each PSC needs to be dealt with individually” and this makes enquiries very expensive for HMRC “even when… workers …are … working in the same way as a client”;
  • Finally, the 3 alternative solutions (see below) in Chapter 6 seem to imply that the extension of the public sector rules is the preferred solution as the others would keep the IR35 decision at the PSC level:
    1. Extending the public sector reform to the private sector.
    2. Requiring Businesses to secure their supply chains.
    3. Additional recordkeeping.

What is the timescale?
Last year saw public sector workers move into direct employment roles en mass, following the rule change in April 2017 for a variety of reasons but mainly pressure from the end user, despite the fact that (Chapter 4.25) HMRC’s data shows that “the CEST tool delivers a self-employed outcome in 60% of cases”.  The fear is that large companies in the private sector may take the same approach and, following the introduction of the new rules in April 2019, there will be ‘blanket decisions’ whereby workers will be forced into false employment arrangements.

There was much grinding of teeth when IR35 was introduced in 2000 but it ultimately proved to be a toothless tiger. If the off-payroll rules in the public sector, introduced in 2017, gave the legislation its first set of dentures then the extension of these rules to the private sector could mean that a Tyrannosaurus Rex is about to be unleashed into the world of the gig economy!

This will bring angst and confusion for the whole supply chain. It seems that political uncertainty, Brexit and economic fears are not sufficient concerns to delay this legislation – implying that this is a HMRC/HMT driven initiative. We will need to buckle-up … it’s going to be a rocky ride and umbrella companies are likely to be the big winners!