We attended one of the roundtable discussions held by HMRC last month on the proposed reform of the IR35 tax legislation. This provided some interesting insights into the consultation process and its likely outcomes.
As reported in previous editions of Recruitment Watch here and here, HMRC is proposing to transfer responsibility for assessing IR35 tax status from personal service company contractors to staffing companies when they place these contractors on public sector assignments. If the assignment is within IR35, the staffing company will be responsible for paying the deemed employment income tax and National Insurance contributions.
As part of the consultation process on the proposed reforms, HMRC has recently held a number of roundtable discussions with stakeholders. Our attendance at one of these events provided us with the following insights:
Reform will go ahead next April
HMRC will keep to its intended implementation date of April 2017 despite concerns that this does not give staffing companies enough time to introduce new systems and processes to deal with the changes.
HMRC is developing a new digital tool which is intended to make it easy to assess IR35 status and provide HMRC's view of the correct tax treatment. Draft questions for the digital tool were provided at the roundtable event. Volunteering comments on the questions was slightly hindered by not being provided with a decision tree, in other words, not being able to see where the user of the tool would be led when clicking on the various responses to the questions. Some of the language of the draft questions is, by HMRC's own admission, too "technical". Examples of technical language include references to "office holders" and "close companies". HMRC intends to simplify the language.
HMRC confirmed that it will not be a statutory requirement to use the digital tool and the IR35 status determined by the digital tool will not be legally binding. However, HMRC will recommend the use of the digital tool and will stand by the status determination if the correct facts have been entered.
HMRC accepts that the facts may change during the course of an assignment and is considering allowing the initial status determination to stand for a certain period, for example, three months. HMRC also recognises that there will still be grey areas, but expects the digital tool to provide an IR35 status determination in 80 to 90% of cases. The digital tool will be updated regularly, for example, to take account of new case law.
Legal obligation on the public sector body to provide information
HMRC queried whether a statutory obligation should be placed on the public sector end user of the services to provide information about the assignment so that IR35 status can be assessed. Depending on the consequences of failure to comply, a statutory obligation may have more clout than a contractual obligation. It would also assist staffing companies when they supply resourcing services via a managed service provider, and so do not have a direct contract with the end user client and are, as is often the case, prevented in their contract with the managed service provider from having direct contact with the client.
Staffing companies will have responsibility for assessing IR35 tax status
Where there are no intermediaries between the public sector body and the personal service company, it is proposed that the public sector body will have responsibility for assessing IR35 tax status. In more complex supply chains, the intermediary closest in the supply chain to the personal service company will have this responsibility. This will often be a staffing company. HMRC does not intend to make the public sector body responsible in all cases because, rightly or wrongly, HMRC perceives staffing companies to be part of the compliance problem. This seems an unfair burden to place on staffing companies. They provide resourcing services and cannot be expected to have a detailed knowledge of the assignments on which they help place contractors. Personal service companies and the public sector bodies which are the end users of their services are far better placed to assess the nature of assignments for tax purposes. Furthermore, a point acknowledged by HMRC, some staffing companies do not always know the ultimate end user of the contractor's services. A staffing company's direct client may supply the contractor's services onward to its own client. Nevertheless, HMRC expects all parties in the supply chain to have a sensible discussion about the facts of an assignment.
Public sector assignments only
The public sector is being targeted for reform as it has reputation issues in this area. HMRC does not currently plan to implement the changes for private sector assignments. However, it expects to be able to devote more resource to ensuring compliance with IR35 in the private sector when the proposed changes have been implemented. HMRC seems set on this course even though it is likely to drive contractors with transferable skills away from the public sector.
It is intended that draft revised legislation will be published a week or so after the Autumn Statement which will be made on 23 November 2016. HMRC will continue to consult on the digital tool until next April. Staffing companies, even those that supply only into the private sector, would be well advised to contribute to these consultations and give HMRC feedback on the digital tool.