Fair warning on IR35 preparation

Is the new Chancellor’s statement about IR35 an appeasement or a pitiful response? Colin Cottell investigates

The recently appointed Chancellor of the Exchequer won’t have taken up his new role expecting to be popular. But when Rishi Sunak offered what appeared to be an olive branch to the critics of the IR35 off-payroll rules, due to come into force in April, perhaps even he would have been taken back by the vehemence of the response.

“I’ve spent time with HMRC to ensure that they are not going to be at all heavy handed for the first year to give people time to adjust as well, which I think is an appropriate and fair thing to do.” Sunak was reported as saying.

Perhaps most vehement in his criticism was Dave Chaplin, CEO of ContractorCalculator, a long-standing opponent of the changes to the IR35 rules. He described Sunak’s remarks as “a pitiful response”. “All Rishi Sunak can offer is that he’s had a cosy chat and ask HMRC not to be too hard on firms in the first year,” said Chaplin.

Within a few days of the Chancellor’s remarks the government published its promised review into how the new rules will be implemented.

Describing its approach as “supportive to help customers apply the new rules”, HMRC promised “to take a light-touch approach to penalties”, with no penalties being applied in the first 12 months “unless there is evidence of deliberate non-compliance”. There was also a commitment to continue to deliver education on the off-payroll rules and support to customers in applying them.

However, if the Chancellor was expecting more support for this softer approach from elsewhere in the sector, then he will have been largely disappointed.

According to Crawford Temple, the CEO of PRISM, a trade association for payment intermediaries, people shouldn’t be taken in by the apparent softening of HMRC’s position. “There is a difference between penalties and the tax that is due,” he says. “If you get the assessment wrong and there is tax due you are still going to get hit with the tax that is due – they are just not going to apply penalties,” he explains.

“What it is saying is the rules will apply from 6 April, from which date you [the end hirer] will have to make an assessment, and it has to be carried out with reasonable care. If you are not doing the assessment or you are doing it deliberately wrong, you will still be hit with the penalties.”

No soft landing

John Chaplin, associate partner in EY’s advisory services team, says he doesn’t think that HMRC’s revised approach to compliance makes much difference. While he welcomes the commitment to no penalties except in cases of deliberate non-compliance, he assumes from the government’s silence that there will be no soft landing in terms of liability for income tax and NI, as well as some form of transfer of liability through the supply chain. He is also concerned that the Chancellor’s remarks and the impression of greater leniency on the part of HMRC could be interpreted as a reason by some in the sector not to take compliance with the rules as seriously as they otherwise would have.

“Until those organisations that are sailing too close to the wind are called to account, what it does is give compliant organisations pause for thought that they are being too compliant,” he says.

Nicola Smith, IR35 tax specialist and proprietor at Fairford Tax Consulting, says the way the government has handled the introduction of IR35 reforms has been “woefully inadequate”. “This so-called ‘adjustment period’ should be viewed as anything but by clients, agencies and contractors, and should not encourage affected businesses to delay putting its procedures in place, as this will only cause to increase any potential risk,” she says.

“There is nothing new from the review,” says Matthew Brown, group CEO at workforce management solutions provider giant group. “Hirers need to continue to prepare for the changes by assessing the roles they have which are affected, understanding their risks and the implications of the different solutions available, avoiding non-compliance, and communicating clearly with the contractors involved.”  

The only positive thing to come out of the review, says Brown, is that small businesses have an obligation to declare if the rules apply to them. While this makes it easier for contractors to know in advance whether IR35 will be decided by themselves or the hirer, this is only a small improvement to the rules, says Brown.  

Lighter touch?

Kieran Smith, CEO at driver recruiter Driver Require, says he is generally supportive of the government’s softer approach to applying the new rules. “It will reduce the concerns of many of those limited company contractors, who fall into the grey area, where the CEST tool [HMRC’s tool for making IR35 status determinations] is not definitive.” This lighter touch approach will be of particular benefit in the white collar sector, where decisions on whether someone is inside or outside IR35 are often complex, he says. In contrast, he says, it will have little or no effect in his own sector (haulage), where unless drivers are owner-operators, it is usually clear cut that a driver is caught by IR35.

Smith does not think the HMRC’s soft-landing for 12 months will change the way that end-user clients respond to the new regulations, with many especially the larger organisations likely to make blanket decisions that all limited company contractors are inside IR35. “In order to protect their reputation, top end blue-chip multinationals need to be whiter than white, and therefore will err on the side of caution,” he says.  

The blue collar sector of the economy, such as the haulage industry, will likely go down the route of “self-policing”, Smith predicts – the only proviso being that the government needs to promote the concept of an accreditation body to regulate umbrella firms.

Julia Kermode, CEO of the Freelancer & Contractor Services Association (FCSA), says she welcomes the Chancellor’s promised ‘soft landing’. “With HMRC’s education programme having been delayed because of the General Election, a number of businesses are only now finding out about the reforms, so this is good news,” she says.

However Kermode warns that the softer approach to implementing the rules “might be quite difficult to implement in practice”. One problem for HMRC, she says, could be how to distinguish between deliberate flouting of the rules and non-deliberate or accidental non-compliance caused by lack of knowledge or awareness. If end-hirers take reasonable care in making IR35 status deliberations, then this 12-month commitment that HMRC won’t go in heavy-handed should offer them reassurance. However, she warns that there is risk that how the reforms are policed could depend on the approach of individual tax officers and how they interpret the rules.

Kermode says there is a chance that opposition to the reforms in the House of Lords could make a difference in time. However, in the meantime, she “strongly urges” everyone in the sector to prepare for the reforms.

EY’s Chaplin says that while the measures announced in the Review are evidence that “the government is listening, in the nicest possible way – it is too little, too late”.

However, the recent government announcements will not be the final word on the IR35 legislation, Chaplin predicts: “It will be another 12-18 months before things bed in and then I see the need for more clarification, and maybe additional tweaks to the legislation and additional guidance. I don’t think HMRC can implement the legislation on 6 April, give a 12-month soft landing and walk away clapping their hands together because the job is finished because it won’t be.”

You have been warned.

HMRC and HM Treasury were approached for comment.


Key points

  • Taxpayers will not have to pay penalties for inaccuracies relating to the off-payroll working rules in the first 12 months unless there is evidence of deliberate non-compliance.
  • HMRC will continue to deliver an education programme on the off-payroll rules.
  • Penalties will still be applied in cases of deliberate non-compliance.
  • No changes in respect of tax and NI liability, and transfer of liability in some circumstances.

 

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