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IR35 private sector reforms update - the consultation is out

Julian Ball

Julian Ball | Legal Director

Thursday 7th Mar, 2019

On 5th March the consultation document was released for the private sector

The consultation was largely as expected although HMRC clearly wants to place even more responsibility and liability on the supply chain than in the public sector. As expected the start date will be April 2020 and the consultation will run until the end of May.

The main changes are:

  • A proposal to pass liability up and down the chain in an MSP type scenario to make sure that HMRC gets the tax
  • The need to provide the contractor with information about how a decision is reached
  • CEST tool will be updated

Legislation

Draft legislation will be published in the summer. Will look very much like public sector legislation.

No changes to IR35 tests

Remains as per existing law. Will look at substitution, part and parcel, control etc. HMRC will have to prove a contractor is “caught.”

Liability

The fee payer (agency) still has responsibility for deducting the tax but liability may pass up the chain if other parties don’t fulfil their obligations.

Information

The Client still needs to make an assessment on whether a role is caught and pass the information down to the agency. If there is a chain (MSP type situation) each person in the chain needs to pass information down the chain. Failure to do so can make that person liable. The contractor will be entitled to ask client for information (not the case in public sector). Although HMRC acknowledges that it may be appropriate to assess roles en bloc it points out that once a person is in a role his situation may be different than someone else in the same role.

Challenges

HMRC expects end clients to put in place a mechanism so a contractor can challenge a decision. There may not be any legal sanction for failure to do so but HMRC are hoping for ideas how this may work from the consultation. HMRC thinks this will prevent blanket determinations (that happened in public sector).

Transfer of liability

As stated in the introduction if the person who has a liability (for failure to meet its obligations) does not pay HMRC then HMRC can go up the chain to the agency/MSP nearest the client and ask for the tax. This may be relevant if a fee payer goes bust and hasn’t paid HMRC. This could also go up to the client if there is no-one else that is solvent to chase. In the public sector so long as the client has taken reasonable care it is off the hook. This is no longer the case HMRC will only go after a client that has taken reasonable care as a last resort. HMRC justifies the above by saying it will make clients and agencies only work with “reputable and compliant firms”. As a result we can see a lot more focus on a compliant supply chain and also IR35 tax loss insurance becoming very popular.

Small company exemption

This is as expected. Follows Companies Act definition of small companies. Need two of:

  • <£10.2M turnover
  • <£5.1M balance sheet
  • <50 employees

Anti-avoidance

Measures will be included to deal with any schemes to get round legislation.

“Contracted out” services

Acknowledges that genuine statement of works took people outside the regime in public sector but points out that agency using the SOW will be within the regime in the public sector.

IR35 in the private sector - Mythbuster

In April 2017, there were major changes to how IR35 is operated in the public sector. Historically, the contractor supplying his company’s services to a client was responsible for determining whether IR35 applied to the assignment. However, from April 2017, this responsibility shifted to the client, with the agency (as the fee payer) becoming responsible for deducting tax from payments to the PSC if IR35 applied. 

Read more here