Reform of IR35 consultation paper issued

Government HMRC Westminster
Posted 2019 by Chris Davies

For some years the government have recognised that the IR35 rules have not been working and introduced legislation in April 2018 to tackle the tax gap but only in relation to those working in the public sector. In the 2018 Budget the government announced that business will become responsible for assessing the employment status of off-payroll workers and a second consultation paper has now been issued to the proposed extension of the off-payroll working rules to come into effect from April 2020 that will apply to workers in the private sector.

The April 2020 reform will use the off-payroll working rules in the public sector as a starting point. This means that clients will be required to make a determination of a worker’s employment status and communicate that determination. In addition, the feepayer (usually the organisation paying the worker’s PSC) will need to make deductions for income tax and NICs and pay any employer NICs. Having listened to concerns expressed by stakeholders about the capacity of clients to implement the changes, the government has decided that the smallest organisations will not be affected by the reform and will not need to determine the status of the off-payroll workers they engage.

What is striking about these proposals is the amount of reliance that the government is placing upon the client to correctly categorise the tax status of the worker. Yes, there is the HMRC online Check Employment Status for Tax (CEST) service tool but that has come under increasing pressure as being not fit for purpose. Moreover, if the worker disagrees with the determination then the client and the worker must battle it out between themselves. I am really concerned that not only do HMRC seem to expect the client and the worker to sort some very complex rules out amongst themselves but that most clients simply will not have the technical knowledge to do so. Large companies will have HR departments that regularly assess worker status as falling within the categories of employee/Worker/Self-employed for the question of employment rights but sadly status for employment rights and tax are entirely different. I doubt very much that even some large companies will have this sort of specialist tax knowledge on hand and I can only fear that clients will tend to adopt a broad-brush approach to the detriment of many within the contracting industry.

The consultation will remain open for comment until 28 May 2019.