Alex Miller 3 Oct 2019 02:59pm

Contracting concerns

Who bears responsibility for IR35 compliance under the off-payroll rules in the private sector from April 2020? Alex Miller investigates why the new IR35 remains a grey area for so many

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Caption: Images: Gallerystock

In August 2019 the UK pharma group GlaxoSmithKline became part of the off-payroll working “IR35” tax story. Nearly 1,500 of GSK’s self-employed contractors working in departments including IT and biomedical sciences received letters in which they were described by HMRC as “disguised employees”. One month later, IR35 made the news again as HMRC won its case against three BBC presenters, in a tribunal ruling that will have repercussions for the hundreds of contracting broadcasters who saw the case as a bellwether. After a series of high-profile defeats for HMRC over its own IR35 legislation, it won against the appeal put forward by Joanna Gosling, David Eades, and Tim Willcox.

The case was decided by a casting vote, after two tribunal judges disagreed over the presenters’ status under IR35. The third, judge Harriet Morgan, concluded that there was “sufficient mutuality and at least a sufficient framework of control to place the assumed relationships between the BBC and the presenters in the employment field”. It has put the BBC under some scrutiny, after judges found that an “imbalance of bargaining power” meant that the BBC forced the three presenters into contracting through personal service companies, and so to reduce their pay. Despite this, the presenters were deemed to be employees in all but name, which makes them liable to be taxed under IR35.

Even though HMRC has published guidance on how companies and agencies can prepare for the legislation, which is designed to stop workers fraudulently claiming to be contractors for tax benefits, it continues to cause confusion. And from 6 April 2020, it will be the responsibility of all medium and large-sized private sector bodies to determine whether contractors fall within the IR35 legislation. TV presenters Christa Ackroyd, Kaye Adams and Lorraine Kelly also had their business arrangements tested before first-tier tribunal (tax) when HMRC demanded six figure sums of PAYE and NIC from their personal service company on the basis that IR35 applied. HMRC won its test case against BBC presenter Ackroyd in September 2018, but subsequently lost a £1.2m case against Kelly in March this year and Loose Women presenter Adams the following month.

Services Direct

Nichola Ross Martin’s website (rossmartin.co.uk) has a useful summary of what off-payroll working actually is, for anyone still in doubt: “An individual (the worker) provides their own personal services via their own private company (their personal service company) to an end client. If the worker is actually providing those services directly to the end client, the worker then meets the employment status tests to make them an actual employee of the end client. “When off-payroll working applies, the top party in the labour supply chain has the obligation to assess employment status and the same or a different party deducts PAYE and National Insurance from the fee paid to the worker’s company. “Different parties in the chain must apply the rules, depending on the type of end client and who the fee payer is.” The new rules in the Finance Bill 2019/20 apply to all engaging organisations in the public sector, but not to the self-employed who engage other workers. In any case, the general consensus among the accounting fraternity is that these changes are being rushed though by HMRC.

Blaming The Tools

Lorraine Kelly’s case highlighted some of the confusion. The courts found she was not within IR35 rules, while HMRC’s own CEST tool (Check Employment Status for Tax) found that she was covered by them. So if CEST is based on HMRC’s own interpretation, could it be faulty? Enhancements have been promised, which will be tested by legal and operational experts and stakeholders. In its consultation response, ICAEW said: “We understand that the updated version of the tool is due to be released in March 2020. “This is too close to the start date and does not give businesses adequate time to review the employment status of the individuals they engage.”

Many stakeholders have urged that more time is needed to iron out some of the most serious issues with the way IR35 changes have been rolled out in the public sector, before extending the rules. As it stands, from April 2020, HMRC says all public authorities and medium and large-sized clients will be responsible for deciding the employment status of workers. If you have an annual turnover of more than £10.2m – known as the “simplified test” – this applies to you. If you are a company; a limited liability partnership; an unregistered company or an overseas company then you cannot use the simplified test but should still apply the rules if you meet two or more of the following conditions: you have an annual turnover of more than £10.2m; a balance sheet total of more than £5.1m; more than 50 employees. This is in line with the small companies regime. The private sector includes third sector organisations, such as some charities.

There are also rules around connected and associated companies. If the parent of a group is medium or large their subsidiaries will also have to apply the off-payroll working rules. The Treasury’s draft legislation also advises companies to: decide the employment status of a worker; do this for every contract you agree with an agency or worker; pass your determination and the reasons for the determination to the worker and the person or organisation you contract with; keep detailed records of your employment status determinations, including the reasons for them and fees paid; and have processes in place to deal with any disputes arising from your determination. Andy Chamberlain, deputy director of policy at the Association of Independent Professionals and the Self-Employed (IPSE), told The Register: “The government’s guidance on the changes to IR35 next April falls woefully short. Not only does it not acknowledge how incredibly difficult it is to make accurate IR35 determinations; it also fails to offer guidance on how to do so. “Fundamentally, however, this is not really about the guidance. The changes to IR35 were a disaster in the public sector, and they will be even worse in the private sector.”

Before the most recent BBC case, chartered accountant David Kirk told economia: “I remain concerned at HMRC’s track record in defending IR35 cases at the Tax Tribunal, that their officers do not understand employment status as well as they should, and this is likely to lead to further challenges – this time from people who can afford to take HMRC on, which PSCs generally cannot.” HMRC has attempted to address concerns over the unfair burden that compliance requirements would place on small businesses. However, its proposed small company exemption is considered too complicated to apply accurately in practice, as well as prone to exploitation from larger firms seeking to circumvent their responsibilities. Its plans to impose tax liability risk on compliant organisations where it is unable to recoup sums from other non-compliant parties in a supply chain also faces strong opposition. “The approach achieves nothing other than HMRC’s satisfaction that it would have multiple targets for tax collection,” adds Kirk.