Following the publication of their consultation, the government have released the Off-payroll Draft Legislation as part of the Finance Bill 2019-2020. The legislation will come into effect in both the public and private sectors from April 2020. Although the consultation sought to address concerns in several areas, the general consensus is that the resulting legislation does little to address these key issues, which are as follows:
- The definition of a small business for the purpose of exemption
- Non-compliance in the labour supply chain
- Clients making non-compliant blanket determinations/ NI deductions
- Giving workers and fee-payers an independent means of challenging status determinations made by client organisations.
- Brexit and the lack of time for businesses to prepare
Small business exemption: A large portion of the legislation addresses the definition of a small business for the purposes of exemption. Many industry bodies expressed their opinion that the amount of variables made the exemption unworkable and open to exploitation, concluding that the exemption was neither workable nor desirable. Despite further convoluted amendments that appear to prove this point, the small business exemption remains. Although the general criteria for a small company is set out in the Companies Act 2006 (i.e. the client’s company must have a turnover of less than £10.2m, balance sheet total £5.1m or less and fewer than 50 employees) variable business structures such as group companies and part-owned companies means that there is plenty scope for confusion.
Liability in the supply chain: The consultation document proposed a complex passing of tax liability through the supply chain where non-compliance arises. This meant that compliant parties could be held liable in the event that the taxman was unable to retrieve sums owed from an offending party further down the chain. The liability would ultimately transfer over to the client if HMRC failed to collect the liability from the first agency. Paragraph 15 of the draft legislation amends the PAYE Regulations with the effect that HMRC can decide to collect PAYE liabilities from a different party within the supply chain, for example a second-tier supplier.
NI deductions and blanket assessments: Although technically the draft legislation replaces s.61T Income Tax (Earnings and Pensions) Act 2003, the consequences for the client of ignoring the contractor’s or deemed employer’s request are the same as before – the client merely becomes responsible for PAYE and employer’s National Insurance contributions instead of the deemed employer. Apparent confusion over the employer’s National Insurance (NI) liability has reportedly resulted in many public sector clients making deductions from payments to contractors. On the issue of blanket IR35 assessments which have featured prominently in the news, the consultation maintains that there is no evidence to support this. In fact, there is significant evidence to suggest that HMRC are complicit in ‘forgone’ assessments. The legislation stipulates that clients must complete a status determination. However, this does not prevent blanket assessments as clients can adopt a copy and paste approach. Effectively, the client can still insist that the contractor goes on the payroll, especially as they hold the deciding power in a disputes procedure.
Appeals process for disputing status determinations: A key criticism of the public sector implementation has been the lack of a suitable appeals process for contractors to dispute status assessments. The client-led procedure proposed by the consultation document met with considerable derision from industry bodies. Not only does it place a burden on clients, many of whom are struggling to understand and interpret the rules, it places the contractor at an obvious and vulnerable disadvantage. Despite this, the legislation does nothing to address demand for an independent appeals procedure. The procedure will mean that clients are more likely to classify contractors as inside IR35 to avoid liability, with the effect that contractors will offset adverse status determinations by demanding correspondingly higher pay. This will inevitably impact on business and ultimately on the economy.
Impact on economy in light of Brexit: Although there have been many calls for a delay to the 2020 reforms, the draft legislation confirms the government’s intention to proceed. This comes after an Early Day Motion was tabled in Westminster, which saw MPs getting behind contractors to call ‘time out’ on the reforms. Again, there is a feeling that the legislation has been rushed through just a few weeks after the consultation document was released. This means that firms will only have five months to prepare for implementing the new rules. With Brexit still unresolved and the UK attempting to hang onto international business, introducing the reforms at this time poses a high risk of impacting negatively on the economy.
It seems certain that the off-payroll reforms will be introduced from April 2020, despite the fact that inherent issues have not been dealt with. Don’t get caught out – in order to protect yourself, make sure you know how the rules could apply to you on each of your assignments by reading our guide here.