Results of the Government Review of the IR35 Off Payroll Working Rules
The Government's review of the implementation of the off payroll working rules reform concluded at the end of February.
The Government plans to continue with the implementation of the reforms, meaning that contractors who contract with clients through the individual's personal service company will come within the rules from 6 April 2020 and thus will be subject to the client determining whether the individual is a "disguised employee" and so should be taxed accordingly.
However, the review has confirmed a few points to give contractors and businesses some comfort:
- HMRC have confirmed again that they will not be using any information provided to open historical enquiries – a client determining that a contractor is now a "disguised employee" will not prejudice the personal service company's previous view that the client was outside the rules, unless fraud or criminal behaviour is suspected.
- HMRC are changing policy to ensure that only services provided on or after 6 April are caught – thus any work done pre 6 April but only paid after would not have that pay subject to the rules.
- As the new rules only apply to medium or large companies the Government will legislate to make it an obligation that clients have to inform the contractor or agents of the businesses size so that whose responsibility for determining whether the contractor is a disguised employee can be clearly understood. A small company, one that meets 2 of the following three criteria – turnover no more than £10.2 million, balance sheet total not more than £5.1 million, no more than 50 employees – is outside the rules, and so the personal service company will continue to have the obligation for determining the status of the contractor.
- HMRC have stated that there will be no penalties (save for deliberate non compliance) for those who inaccurately apply the rules within the first 12 months, to allow businesses to fully understand the rules and make good faith attempts to apply them accurately without the fear of penalties for accidental non compliance. However, any tax not paid due to an incorrect application of the rules will still be due.
- HMRC will amend the legislation to exclude wholly overseas organisations from having to consider the rules. This means that offshore companies, those which are not UK resident and has no UK permanent establishment, will be outside the rules and the personal service company is responsible for reviewing the contractors status.
- If contractors disagree with their end client's determination that the rules apply then they are able to start an internal disagreement process, starting an internal appeal which the end client must review. Clarity will be provided in the legislation regarding the time limits to start the disagreement process in order to deal with end client fears that the current disagreement process had no deadline for when disagreements could be started, leading to uncertainty as to whether claims would be brought.
- HMRC will increase both awareness raising efforts and produce more information for those affected about how the rules work and impact them.
HMRC have said that external research into the off payroll working rules reform will be commissioned six months after implementation so there is potential for further updates.
Contractors will need to be aware that if their client is a small company or has no UK presence the obligation to make an assessment will remain with their personal service company.
The rules will still be taking affect from 6 April 2020 and businesses and individuals should prepare themselves for the changes. Whilst HMRC have said that there won't be penalties for those who make mistakes in good faith in the first 12 months any extra tax that should have been paid as consequence of an incorrect assessment will still be payable and it would be wise, if there is any uncertainty, for client businesses to take professional advice on the status of their existing contracts. Equally contractors should make sure they are aware as to whether they are likely to fall within the rules or not, both for existing contracts that carry over past 6 April 2020 and for any new contract their PSC enters into.
Oliver Claridge is an Associate in our Tax team.