We are all now well aware of recent HMRC attempts to restrict the use of PSCs in the public sector. Indeed, the (now ‘ex’) Chancellor made this initiative a major selling point in his March 2016 Budget, presumably in a bid to show the public at large, just how seriously the Government takes ‘cracking down’ on so-called tax abuse.
Although introduced in the last Budget, a new regime affecting public sector PSC contractors is not set to become law until April 2017. By which time it is intended that HMRC will have created a far simpler method than available today, to help determine IR35 status. However, the real sting in the tail is the proposal that where a PSC contractor is paid ‘off payroll’, (i.e. without the deduction of tax and NI under PAYE), but subsequently it is determined that such payment(s) should have been ‘caught’ by IR35, then in the event of non-payment of the correct tax, the Government department making such a misclassified payment (or, in the case where an intermediary is involved in the supply, the last entity paying the PSC) will be ultimately responsible for any shortfall in the correct amount of tax due – including employers NI. The effect of this will be that the decision on the application of IR35 will rest with the engager and not with the PSC.
Even though these proposals are stated to apply only to ‘public’ bodies engaging PSCs, many observers have commented that this fundamental change in how IR35 is applied, is merely a “dry run” which, if successful, will subsequently be rolled out to cover all PSC engagements – both in the private sector as well as the public sector. If this is to be the case, the question remains – how and when?
To address these two vitally important questions, there are a number of critical hurdles that HMRC must first overcome:
a) Is it acceptable to ask one party to a contract, to make a determination of the other party’s tax classification? IR35 determination is an imprecise science at best (as evidenced by the number of IR35 cases that HMRC have fought and lost, to date) and is actually based on a number of wide ranging factors. Critically, it is not based purely on empirical data. Where subjectivity comes into play, what is considered ‘caught’ by one man, may be determined as ‘outside’ IR35 by another. HMRC have stated that it is their intention to issue new guidelines/online tools to help engagers determine IR35 status. But notably, previous attempts at this have shown that it is much more difficult to do in practice than they like to believe. Unless the regulations applicable to IR35 are fundamentally overhauled, status is governed by Tax law and subsequent case precedent, and not by a set of HMRC questionnaires. For a correct IR35 assessment to be made, not only must the relevant factors be considered pertaining to the contract in question, but also so must many other factors, most of which are unlikely to be known by the engager. To err on the side of caution will undoubtedly lead to ‘false employment’.
b) The temporary recruitment industry has been a major factor in the UK’s ability to bounce back from the recent recession so quickly and successfully. HMRC has conducted research into the acceptability of their proposal, to pass ultimate responsibility for unpaid tax to the engager. Results (published in July 2016) suggest overwhelming disapproval from all sectors – including end users of contract labour as well as most intermediaries. In the face of such overwhelming adversity, how strong is the Government’s appetite to go ahead and introduce such unpopular regulations? Without Debt Transfer, these proposals will be as ineffective as current IR35 legislation
c) In view of the recent Brexit result, will the Government have more on its plate than it can reasonably handle over the next few years?
Therefore, HMRC and the Government have quite a challenge in front of them, if they are to: a) make a success of introducing their proposals as they pertain to the public sector, and; b) to roll these changes out to the private sector at large. My guess is that until such time as IR35 is scrapped and replaced by legislation that is clear, concise and much easier to enforce (based on empirical rather than subjective evidence), tinkering around at the edges will only lead to confusion and frustration for all.