Government respond to IR35 review with changes

Last week the government published its response to their review of IR35. Included in the 22-page document were some changes to the proposals in the draft legislation published in July 2019. Below are four of the biggest policy changes following the review

1. Small businesses exempt from the new rules will be obliged to declare their status

The government’s exemption for small businesses was one of the most complicated parts of an already complicated reform. It makes the legislation substantially different to the rules in the public sector and carries substantial risks to recruitment agencies for accidental non-compliance. To try to address these concerns the government has said that it will bring forward legislation that places a legal obligation on clients to respond to a request for information about their size from an agency or a worker. This will relieve agencies of having to work out if their clients are exempt from the rules. Although this is a welcome step – and a direct response to what the REC has been calling for – the existence of a small business exemption still creates a two-tier tax system.

2. A soft approach to compliance for the first year

HMRC have announced that they will be taking a “light touch” approach to penalties in the first 12 months – unless there is evidence of deliberate non-compliance. Taking a light touch approach to enforcement in the first year will undoubtably cause confusion and create an unlevel playing field where compliant employers lose out to unethical ones. It is clear that having undertaken the review, the government knows that it has greatly underestimated the time it will take for businesses to be compliant by 6 April and so are trying to make concessions. Rather than tinkering around the edges of this complex legislation, we have consistently called for the government to delay implementation until 2021 to ensure businesses have time to be fully compliant. The current timetable leaves a maximum of ten working days between the publication of final legislation and implementation on 6 April.

3. Wholly overseas clients will be exempt from the new rules

The REC welcomes this decision and the clarity it provides our members supplying workers overseas. During the review a host of concerns were raised about how the rules would work for agencies and Personal Service Companies (PSC) supplying work to client overseas. Following these concerns the government has promised to amend the legislation to exclude wholly overseas organisations with no UK presence from having to consider the off-payroll working rules. This means that where the client is wholly overseas, the old rules will apply and it will be the responsibility of the individual’s limited company to determine someone’s IR35 status.

4. New rules to apply to payments made for services after 6 April

A major area of concern for clients and agencies was the application of the rules to payments made for services provided before 6 April 2020. Members repeatedly expressed the practical implications this would have on payroll. HMRC responded in early February to this issue by announcing a change to the policy whereby the rules only apply to payments made for services provided on or after 6 April 2020.  Although this is a welcome and sensible change, it may be too little too late for many contractors who have already had their contracts terminated by clients worried about accidental non-compliance.

On the surface the government has done well to try and address some of the issues related to the draft proposal. However there are still some unresolved issues.

The REC has always believed that liability must rest with the end user client rather than the agency (where it is the fee-payer). However, government has failed to explain why there are incidents where the client’s liability will transfer on to the fee payer. For example, it cannot be right that where the client takes reasonable care in making its status decision, but still gets it wrong, the fee payer will be liable for loss of tax. If government wants to ensure compliance throughout the supply chain then they must hold end clients liable for their supply chains.

While it is encouraging to see government listen and act on some of the feedback provided by business during the review, we are still pushing the Chancellor to think again about the problems that will ensue if this legislation is introduced in one month’s time. The final legislation is expected to be in the Finance Bill 2020 which will be published on 19 March 2020. Model templates will be available for REC members shortly after this date and more information can be found on the IR35 hub

Image credit | iStock

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