Agencies in final push to fix IR35 'anomalies'

A set of “anomalies” in how the taxman proposes to enforce next week’s changes to IR35 in the public sector have been flagged up to MPs, in a last-ditch effort to correct them.

The Association of Recruitment Consultancies (ARC) highlighted the “series of difficulties” to the MPs because the changes are contained in the Finance Bill that they are considering.

"The letter has been sent to all MPs with the exception of ministers within HMRC, as we have been having more specific dialogue with them," an ARC spokesman said.

"[But] HMRC are fully aware [too becasuse] our lawyers formally wrote to HMRC about the proposed IR35 rules and our concerns early this month."

Aside from a lack of proper transitional provisions for existing contracts and hikes in the value of tax and NICs, one anomaly is that the ‘fee-payer’ is going to be initially responsible for assessing status.

“The core underlying issue is the continued use of the old-fashioned IR35 test as the starting point,” said the ARC. “Surely that baby is now too big for the pram?”

The association was referring to HMRC stipulating that it is the fee-payer who “must” first “look” at the arrangements and “apply employment status test[s] based on case law.”

The ARC reflected: “Its continued use leads to all the conflicts that arise; the need for the much-criticised online tool, and the various damaging impacts that do not appear to have been properly thought-through.”

To postpone those impacts, the MPs are urged to “bring about a delay in implementation” of the IR35 reforms, to avoid a “new business tax regime…that effectively jumps the gun.”

ARC’s chair Adrian Marlowe explained: “[It] would make sense to await the outcome of the Matthew Taylor and HOC Select Committee reports…expected later this year.”

If the MPs refuse and favour taking action, then it should be in the shape of one of the association’s three “alternative options to address tax avoidance under IR35.”

The options, including one that automatically deems IR35 to apply unless evidence to the contrary can be shown, are -- unlike the current proposals -- “in accordance with general [tax and legal] principles.”

Mr Marlowe also said: “[Our] options allow the contractor to remain ultimately responsible for its own tax affairs…[while] all parties concerned have clarity and HMRC achieves its tax objectives.”

But due to a small but significant tweak to last week’s final legislative draft, PSCs might be more concerned by what appears to be a new duty on them to provide information.

In fact, the new obligation seems to be on the worker to notify the potential deemed employer (i.e. the fee-payer) whether their intermediary meets the conditions of liability for IR35 to apply.

“If the worker doesn’t inform the deemed employer then the deemed employer must assume that the conditions of liability are met”, advises Nicola Pitcher, a senior manager at EY.

“[And they] will need to operate PAYE and NIC if the engagement is otherwise deemed to be an employment by the legislation. Note that there is no transfer of liability to the worker or their intermediary.”

Pitcher also pointed out that, under last week’s revisions to the April 6^th legislation ‘public authority’ has been widened to include the National Assembly for Wales Commission, the Northern Ireland Assembly Commission, the House of Lords and the House of Commons.