It’s always been the intention to exclude small businesses from the rules, but there is still no watertight definition of what will constitute a small business.
In the public sector, where the rules already apply, the size of the organisation is irrelevant as the rules apply to all. However, in the private sector the size of the business will be a crucial factor.
A legal no-man’s land beckons for small private companies, do they need to implement IR35 rules or not? The current consultation suggests using the definition of small company from the Companies Act 2006, but this only applies to limited companies. If you’re a small unincorporated business, for example a sole-trader or a partnership, you probably need to tread very carefully and take appropriate advice before concluding you’re safe from IR35.
The consultation proposes defining whether an unincorporated business is small by the number of its employees. This is a questionable approach given a company might qualify as ‘small’ only if it defines members of its workforce as off-payroll, the whole crux of the issue IR35 is trying to address.
The government wants to ensure that all parties in the labour supply chain have sufficient information in order to comply with their obligations, proposing that the determination of status, and the reason for the determination be cascaded to all parties in the supply chain. They therefore consider it necessary to legislate to ensure this happens, while at the same time suggesting that a client-led process is used to deal with any challenges to the determination. The government suggests that such an approach, where the individual can raise a concern with the client that issued it, will lead to the client taking reasonable care when reaching its final view on the status determination. This remains to be seen!
To support clients and workers HMRC is still promoting the use of the Check Employment status for Tax (CEST) tool, introduced in 2017 to help with the public sector roll out. HMRC still considers the tool capable of making a determination in 85% of cases. That said, it’s reviewing the tool, looking to identify improvements and then test enhancements with stakeholders before the latest reform is implemented. Given HMRC’s claim that the tool has been used more than 750,000 times in relation to the public sector, several million decisions are likely to be required when rolled out to the private sector. There’s a risk this could lead to a potential IT melt down and a large number of unanswered questions, even if the 85% determination rate is maintained.
The consultation also raises a significant question over timing. It has pledged that the legislation to introduce IR35 changes will be in a draft Summer Finance Bill, but the consultation runs to 28 May 2019. This leaves a very short window for it to be incorporated into any draft Summer Finance Bill, which would have to be published soon after the deadline to allow time to pass through parliament.
Introducing the relevant IR35 legislation after the Autumn Budget may be too late to meet the target implementation date of April 2020. In trying to introduce complicated legal changes in a relatively short space of time, the government is likely to run up against its own self-imposed deadline – and a potential repeat of what happened when IR35 was introduced in the Public Sector – with only a matter of weeks of notice.
Nigel Morris is employment tax director at MHA MacIntyre Hudson comments