Leaked proposal to hit PSCs 'confirmed'

The finer details of the leaked proposal with the potential to reform IR35 and the rules on personal service companies (PSCs) have been obtained by ContractorUK.

No longer will PSC contractors be able to work for a single client for an uncapped period, suggests the proposal, which was initially outlined to the Guardian by a ‘government source.’

But contrary to what the newspaper reported, PSC contractors will not “be obliged to move on to the [client’s] payroll if they work…for more than a month,” as long as they pass a test.

The test will be online; is set to be a new version of the ESI and will probe for Supervision, Direction or Control (SDC), “much in the same way as the onshore legislation [does].”

The latter is a staffing body’s advice to its members, who are also being told a “high level” Treasury source “confirmed” to it the proposal as accurate. A Treasury spokesperson declined to comment to ContractorUK. 

‘More than one client at a time’

But the body is also privately briefing its member agencies that “the only carve out” from taking the SDC test after month “one or two,” is if the contractor has “more than one client at a time.”

As to who “must decide whether or not they are inside IR35” - so which contractual party should stop proceedings as early as four weeks in, to determine the PSC’s status, it is unclear.

The body thinks it will be the client – in line with the IR35 ‘discussion document’ - but it also told its members, who place contractors across the UK, that it “could be the intermediary.”

Any moving of an IR35-caught PSC’s tax liability from a client (as the discussion document suggested) to others will please the CBI, which lobbied in 1999 to keep end-users out of scope of the legislation.

CBI: No knowledge of the proposal

Shown the proposal first leaked to the Guardian, the CBI told ContractorUK that it had no knowledge of it; nor was it briefed on anything similar at its conference, which the newspaper claimed it was.

But the proposal which the staffing body is briefing its members about – a carbon copy of the one reported by the broadsheet – will come with a MSC-style ‘debt transfer’ provision.

This will ensure any unpaid taxes can be recovered by HMRC from “other parties in the supply chain,” the body is advisedly warning its members.

If it is sound, the body’s advice indicates that HMRC and the government still want to keep the CBI on side, seemingly to head off any political fallout from the proposal.

Due ‘for release in 2016’

A HMRC spokesman declined to comment. However, the Revenue is known to be “developing an online digital service to help IR35 customers work our whether the rules apply to them.”

This wording, in a letter last month by Treasury minister David Gauke, also says that the service is due “for release in 2016.” The SDC test in an expanded ESI seems to fit the mould.

But the timetable is too optimistic for a legal firm. “It seems unlikely that such broad changes will be introduced as soon as April 2016,” said the firm, a specialist in contractor compliance.

“And, if they are, it seems unlikely that the draft legislation will be published as soon as 9^th December when the rest of the Finance Bill clauses are due for publication.”

‘Kite is being flown’

Asked, then, how it explains the proposal - the one anonymously outlined to the Guardian, or the one the staffing body says its Treasury source has confirmed as accurate, the firm said it smacked of political tactics.

“It seems to us that a ‘kite is being flown’ to see how much fuss these ideas generate, before firm proposals are put forward… [while leaving room for a] backtrack,” the firm said.

A person familiar with the proposal who is independent of the staffing body, and who did not know of the private briefing the body gave its members, hinted that ‘a kite’ was wishful thinking, but agreed on the optimistic timetable, saying “April 2017” was probably a more realistic commencement date for statutory changes to IR35.

‘PSCs will have to prove that they don’t have to operate IR35’

“Eventually, clients will have to verify that their PSCs don’t have to operate IR35,” the person said. “And people with their own PSC will ultimately have to prove that they have the right not to operate IR35.

“They’ll have to supply the result from a new ESI test, which I’m absolutely certain is going to be revamped to include SDC. If your contract is over two months, then prepare for the ESI test.

“PSCs will then use the ESI test result [if it’s an ‘outside-IR35 outcome] as proof that they can continue contracting as a PSC, assuming they’re not a Managed Service Company.”

‘Onus on engagers’

According to the source, who sat at roundtable meetings with HMRC in September on IR35 reform and T&S relief, HMRC is going to record the individual reference numbers of ‘IR35-caught‘ responses that the revamped ESI throws out.

“It will be an online system but the current ESI doesn’t track personal details so the onus is going to be on engagers to ensure that they have the reference numbers of their PSCs.

“In this way, clients will have to verify that their PSCs don’t have to operate IR35. The Revenue’s end game is to have one single test that includes SDC for both expenses and status, so PSCs must test to see if they are free from IR35 and free from restrictions on tax relief on travel and subsistence expenses.

“But it’s almost not necessary; if you’re caught by IR35 because of SDC, then you’re not going to be due any relief on expenses. It seems though that T&S reform will hit contractors before IR35 reform.”   

HMRC will ‘leave the door slightly ajar’

The source reflected that, based on their own many years’ experience of working at the tax department, it was typical for HMRC to want to “leave the door slightly ajar.”

As a result, any proposal next week with the effect of a PSC potentially having to join their client’s payroll may merely turn out to be one of a few possible ‘options’ that HMRC is going to consult upon at Autumn Statement 2015. It is therefore possible that the 'cap on contracting' is not the only possible plan to tighten the rules for PSCs.

“The freedom to freelance [will likely] remain,” explained the source, who now runs an accountancy firm, a services provider and a payroll bureau. “But in the end…there will be no choice but to adopt this strategy of observing and responding to IR35 on a contract-by-contract basis.

“So from April 2017, I’d wager that it’s going to be entirely possible to be inside IR35 in one engagement and outside IR35 in another; sometimes there may be more tax to pay, and the extra administration will definitely be an aggravation”.

The source added: “Everyone agrees that HMRC bolted the stable door after the horse had gone with IR35, and it's true to say that the new, 'improved' version of IR35 would bolt the door but also starve the poor horse to death.”