On 11 July 2019 the government published draft legislation (Draft Legislation) together with a summary of responses (Response Paper) to the policy paper and consultation document issued in March 2019 regarding proposed changes to the off-payroll working rules, commonly referred to as the IR35 regime, which apply to the private sector.
The private sector IR35 regime applies where an individual provides their services (directly or indirectly) through a personal service company (a PSC) to another person or entity (an End-User) in circumstances where, had the individual provided their services directly to the End-User rather than through their PSC, they would have been an employee (or office-holder) of the End-User.
Currently it is the responsibility of the PSC to determine whether the regime applies and, if so, to account for income tax and national insurance contributions through the PAYE system on a deemed payment of employment income (the IR35 Liabilities). Importantly for End-Users no obligations are placed on the End-User and the liability of the PSC to account for the IR35 Liabilities cannot be transferred to the End-User.
The government announced at Budget 2018 that, with effect from 6 April 2020, changes would be made to the current private sector IR35 regime (save in the case of small private sector businesses to which the current rules will continue to apply, at least in the short term), and the Response and Draft Legislation have now confirmed that those changes will apply and build on the IR35 rules which have applied to the public sector since 2017.
This will mean that, from April 2020:
- Medium and large private sector End-Users, rather than PSCs, will be required to make a determination of an individual’s employment status under the IR35 regime; and
- Generally, the organisation in the supply chain which pays the PSC (a Fee-Payer) will be required to include the individual on their payroll and account for the relevant IR35 Liabilities on the payments made to the PSC.
Additional changes, which build on the current public sector regime (and which will also apply to the public sector) include:
- A requirement on the End-User to provide (i) their determination and (ii) the reasons for that determination, to both the party they contract with in the supply chain and directly to the individual worker themselves, together with an obligation on each subsequent party in the supply chain (after the End-User) to pass on such determination and accompanying reasons to the party they contract with until they reach the Fee-Payer in the supply chain, with non-compliance resulting in any IR35 Liabilities remaining with the defaulting party; and
- A requirement on the End-User to put in place a process for dealing with status determination disagreements.
The Response Paper and Draft Legislation have also confirmed that the government intends to proceed with one of the more controversial proposals set out in the March consultation paper, namely the ability of HMRC to transfer any unrecovered IR35 Liabilities from the party in the supply chain which had the primary obligation to account for the same to the first party or agency in the supply chain (i.e. that which the End-User contracts with) and, if recovery is then not obtained from that party, to the End-User.
The government has however, indicated that it is not the intention that liability transfers will take place in all instances of non-recovery, with the Response suggesting that liability transfers would only occur in circumstances such as where a “promoter of tax avoidance” is involved in the supply chain and not, for example, where the inability of HMRC to collect from the party with primary liability arises as a result of a genuine business failure (i.e. an event of genuine insolvency of the party with the primary obligation to account for the relevant IR35 Liabilities).
Whilst, on the face of it, this appears to represent a softening of HMRC’s position, unhelpfully, neither the Response nor the Draft Legislation provide sufficient clarity on the circumstances where liability would not be transferred back up the supply chain, with the Response indicating that such clarification will come in the form of future guidance from HMRC.
Given the potentially significant impact that these reforms will have on End-Users, Fee-Payers and any other party or agency which sits within a supply chain supplying the services of the individual to the End-User, it will be important that all such organisations take advantage of the rapidly reducing time available prior to 6 April 2020 to fully prepare for their introduction.
As a starting point, all such organisations will need to review the nature of, and their role in, any existing off-payroll engagements to determine which are likely to fall within the scope of the reforms, which will provide them with an understanding of the potential impact of the reforms. It is likely that any affected organisations will have to implement significant changes to existing arrangements and internal systems and processes, as well as assessing the impact of any additional tax (and other costs) which may arise as a result of the reforms – and sufficient time should be allowed for undertaking this exercise. In particular, End-Users will be required to ensure that adequate internal systems and processes are implemented to ensure compliance with their obligations under the new IR35 regime.