Government publishes draft IR35 legislation for private sector off-payroll rules

Draft IR35 legislation for off-payroll working in the private sector has today been published in Finance Bill 2019/20, containing a vow to forge ahead with the reforms from next April.

The promise will disappoint 10 contractor organisations who, on behalf of limited company contractors, called for the reforms to be delayed by 12 months due to their sheer scale.

But Jesse Norman MP says the rules to “ensure two people working side by side in a similar role for the same employer pay the same employment taxes,” will hit from April 2020.

'Necessary employment taxes'

Unveiling the bill this afternoon, the Treasury minister also said: “The government has previously announced that it will improve compliance with the off-payroll working rules in all sectors by bringing them into line with the public sector from April 2020.

“The reform will make organisations responsible for determining whether the existing rules apply to the contractors they hire and ensuring the necessary employment taxes are paid.”

But the draft makes clear that it is not just engagers who stand to be affected by the framework, which affected parties, including recruitment agencies, have until September 5th to respond to.

'Challenge the determinations'

“The draft legislation also includes provisions to ensure that all parties in the labour supply chain are aware of the organisation’s decision and the reasons for that decision,” Mr Norman said.

“And [the government] will introduce a statutory, client-led status disagreement process to allow individuals and fee-payers to challenge the organisation’s determinations.”

In this sense, the draft includes no “curveballs” – a term Qdos used last night to describe unexpected clauses, because the client-led dispute process was proposed back in May.

'45 days'

The decision-making awareness proposal is also not ‘new’ but to strengthen it, clients will be required to pass their reasoning on IR35 “to both the party it contracts with and the worker ” – within 45 days.

But less positively for PSCs, the official 20-page response to the off-payroll consultation says industry is wrong to imply clients have incentives to be risk-averse in their decision-making.

“The government does not agree that there are significant incentives for deeming individuals to be employees,” it claims, despite acknowledging clients can be liable if they incorrectly deem ‘outside’ (but not ‘inside’).

'Transfer of liability'

The response adds: “[The government further] considers the client to be best able to understand the contractual terms and working practices of those it engages.

“Clients are also best placed to provide responses in real time. A HMRC-led status disagreement process would not be able to provide decisions in real time, with a consequential impact on the flexibility of the work force.”

Seeming to heap further pain on engagers, new HMRC guidance on the proposed off-payroll rules states: “Provisions to allow for the transfer of liability and the transfer of information through labour supply chains will also be included.”

'170,000; 230,000 and 60,000 = no impact'

At the end of the Revenue guidance, the government adds that the 2020 framework is “not expected to have any significant macro-economic impacts.”

However, the guidance then says taxpayers will ‘shift their structure to mitigate the tax changes,’ which overall will impact some 170,000 individuals who work via their own PSC.

A further 230,000 PSCs will apparently achieve savings (‘by no longer having the requirement for determining status or associated accounting burdens’), and some 60,000 organisations will be impacted by having to decide the status of companies they engage.

'Appropriate'

And while the full bill – visible only after some time this afternoon due to broken page links on HMT’s website, reaffirms the 'small company' exemption, there is no mention of the many recruitment agencies that stand to be affected.

Reassuringly for contractors’ time-pressed partner businesses, however, the Treasury stands by HMRC’s tentative backing for what industry has denounced as blanketing.

“Applying a decision to a group of off-payroll workers with the same role, working practices and contractual conditions can be appropriate in some circumstances,” the government says on page 16 of its response.

'HMRC is clear'

“However, HMRC is clear that it is not right to rule all engagements to be within or outside of the rules irrespective of the contractual terms and actual working arrangements.”

But blanketing apparently won’t be a problem anyway, contrary to what a leading barrister has suggested.

Officials claim: “Evidence from the introduction of the reformed off-payroll working rules in the public sector shows that most public authorities are making assessments on a case-by-case basis and there is no evidence of blanket determinations.

“No evidence was provided in this consultation to support the suggestion that blanket determinations will be a particular problem in the private and third sectors. All organisations are required to take reasonable care in making their decisions”.

'Not a template'

The wording – which could be lifted straight from what the Treasury said in 2017 in relation to the public sector IR35 reforms, vindicates Qdos’ Seb Maley.

Speaking just before the bill’s publication, the IR35 adviser said he ‘did not imagine that HMRC would use too much imagination in drafting the new rules.

Although he has now been proven right, it is at odds with assurances by the Revenue’s Jim Harra, whose evidence to MPs in March was that the 2017 IR35 reform was ‘not a template HMRC can simply stick onto the more diverse commercial sector.’

'Huge'

The Association of Independent Professionals and the Self-Employed sounds more than a little disappointed. “Extending these rules [from the public sector] will put a huge extra burden on organisations which depend on the use of highly-skilled flexible workers to help them succeed.

“With such short notice,” IPSE added, “the Treasury has left businesses to choose between access to the skills they desperately need and trying to rush implementation of rules even HMRC itself doesn’t understand.”  

The association was referring to HMRC being on losing streak with IR35 tribunal cases – tried under the legislation of 2000, most recently with a loss to Talksport presenter Paul Hawskbee who it wrongly found inside IR35.

According to tax consultancy Markel, that legislation now has a modern successor of equally great significance : “Draft legislation on the private sector…herald[s] the biggest shake-up in the IR35 rules since their introduction almost 20 years ago.”

Editor's Note: You can discuss this draft IR35 legislation for April 2020, the consultation responses and the HMRC/HMT publications on the ContractorUK Forum.