Following the announcement on Tuesday that HM Treasury will be conducting a review of the implementation of the controversial reforms to IR35 known as the Off-Payroll rules, we take a look at the reforms, and the view that professional associations, industry bodies and big business have formed of the IR35 regulatory changes.
What is Off-Payroll?
Simply put, Off-Payroll shifts the responsibility for IR35 assessment from the individual contractor to the end-client that is hiring them. However, this creates significant complications in the supply chain as the “fee-payer” becomes responsible for deducting PAYE at source in the event that the end-client determines that they are “inside IR35” – however, the fee-payer is usually a third-party recruitment agency. This creates a knock-on issue of the transfer of PAYE debts along the chain in the event that a company defaults or goes bust.
The new IR35 rules eliminate the five per cent expenses allowance for IR35-caught contractors, leaving contractors working “inside IR35” paying full PAYE income tax and National Insurance but without any of the statutory rights afforded to employees.
To further complicate matters, small businesses are exempt from the IR35 rules, and the entire situation creates the need for a dispute process in the event that the contractor disagrees with the end-client’s decision, an outcome which is quite likely, given the difficulty in making clear-cut IR35 determinations in many cases.
There is also uncertainty over how contracts that straddle the implementation date will be treated.
Phew! So why is the government changing the IR35 rules?
HM Revenue & Customs believe that there is widespread tax avoidance taking place under the current IR35 regime – they estimate that around 90 per cent of contractors who are caught by IR35 simply ignore the rules and pay themselves on a self-employed basis anyway.
HMRC estimated the cost to the Exchequer of IR35 non-compliance as £700 million in 2017-18, which they project will rise to £1.2 billion in 2022-23. IR35 enforcement is a costly process and can end up with the contractor challenging HMRC’s decision at the tax tribunal, where HMRC have a questionable record of success.
However, the methodology used in arriving at these figures has been questioned by both the Freelancer & Contractor Services Association (here) and the Institute of Chartered Accountants of Scotland (in their consultation response).
HMRC claim that since rolling out the IR35 reforms to the public sector in 2017, an additional £550 million in income tax and National Insurance was raised. However, there is evidence that some public sector bodies have simply applied a “blanket” approach, ruling all contractors to be “inside IR35”. If that is the case, genuinely self-employed contractors would have been forced to pay a higher level of tax than they should have paid as a direct result of the Off-Payroll regime.
So what does industry think of the reformed IR35 rules?
Experts believe that the private sector is not ready for the reforms and that they should be delayed until at least April 2021. The IR35 reforms have already been delayed by one year, but many believe that HMRC have been slow to inform the private sector of the detail of how the IR35 rules will work. A consultation document on the changes was not published until four months after the 2018 Budget and the draft legislation was not published until July 2019, negating much of the benefit of the year’s delay. This was exacerbated by the ongoing political uncertainty surrounding the United Kingdom’s departure from the European Union throughout 2018 and 2019.
There also remain concerns over the effectiveness of HMRC’s online IR35 status checker, CEST.
Who is calling for a delay?
Whilst not an exhaustive list, our research has revealed that the following people or organisations have called for a delay to the Off-Payroll roll-out in the public domain:
- The Institute of Chartered Accountants in England and Wales (ICAEW) source
- The Institute of Chartered Accountants of Scotland (ICAS) source
- The Association of Certified Chartered Accountants (ACCA) source
- The Association of Taxation Technicians (ATT) source
- The Association of Accounting Technicians (AAT) source
- The Chartered Institute of Payroll Professionals (CIPP) source
- The Confederation of British Industry (CBI) source
- The Institute of Directors (IoD) source
- The Federation of Small Business (FSB) source 1 source 2
- The Recruitment and Employment Confederation (REC) source
- The Association of Professional Staffing Companies (APSCo) source
- The Association of Independent Professionals and the Self-Employed (IPSE) source
- Hays UK & Ireland source
- Saffery Champness LLP source
- ContractorCalculator.co.uk source
- Qdos Contractor source
- Stop the Off-Payroll Tax campaign
- David Davis MP source
The Law Society, the professional body of solicitors in England and Wales, and the Institute of Chartered Accountants in Scotland (ICAS) both recommended scrapping the proposals altogether, whilst KPMG have said a delay is “preferable”.
In addition, to date 39 MPs from all major political parties have signed Early Day Motion #2379, which calls for the Off-Payroll extension to be abolished “if assurances cannot be given”.
An official petition to repeal Off-Payroll in both the public and private sectors reached over 30,000 signatures before being cancelled due to the 2019 general election.
In announcing the review of Off-Payroll, the government also committed not to delay the implementation of the new IR35 rules. Many industry experts and businesses strongly disagree with this decision. Affected individuals and organisations are now being urged to contact MPs to petition that the implementation is delayed for at least a further year, pending the results of the forthcoming review, and potentially a wider review of the impact that the reforms have had in the public sector.
9th January 2020.