Finance Bill 2019-20: IR35 Off payroll working reform

11th July 2019 saw the long-awaited documents bringing into legislation the extension of the off payroll working rules from the public sector into the private and third sectors. A policy paper, a response to the consultation process, and draft legislation were published today.

In this instance, experience has triumphed over hope and we will see these rules applying from 6th April 2020, unless Parliament intervenes. Given that the House of Commons is currently distracted by the appointment of a new PM and Brexit, this is unlikely.

The policy paper makes many claims as to why the policy is needed. Perhaps most telling however, is the section towards the end of the document with some figures. This measure is calculated to raise £3.1bn. It impacts 170,000 individuals, 230,000 PSCs, 60,000 end clients, 20,000 recruitment agencies. Impressive numbers. That’s around £6,500 per entity.

This is unrealistic. The claim is that the estimated cost of implementing all of the above (480,000 entities in all), would cost just £14.4m. That’s £30 each.

To add further doubt to the validity of equation, the measures claim the cost to HMRC will be £21m over 5 years. That’s £8.75 per entity per year.

With such fantasy numbers being used by HMRC is it any wonder that there are many vociferous organisations saying that these measures are being introduced DESPITE a lack of any reliable evidence?

The summary of responses to the consultation is unfortunately another example of how that process has been reduced to little more than a paper exercise with no real meaning. There are, perhaps, only two matters worth highlighting.

First, the Government rejects the concern that putting the decision of evaluating worker status in the hands of the end user will result in that end user picking the condition that suits them! We have already seen major banks announce a policy which excludes outside IR35 contractors from their ranks because the risk they carry is just too high. Given the second point below, they are correct. It is however easy to see that a bank department, with a fixed budget for a project, is not going to risk an outside IR35 status. They will instead offer the same day rate for an inside IR35 status.

Second, the proposal is that the fee payer is to be treated as the employer. The fee payer is the entity closest the worker’s PSC. If that fee payer fails to pay, liability moves to the “first agency”, the agency engaged by the end client and if they fail to pay, to the end client. The claim is that this will force end clients and first agencies to understand and police the contractual chains.

We think not. We think that this leaves a space for a promoter of a tax avoidance scheme to insert themselves into the chain, take fees, disappear and leave the liability elsewhere.

We are pleased to note that liability will not fall to the individual worker. However, we have no confidence that an end user, seeking to de-risk a complicated scenario, will be (won’t be?) seeking indemnities and warranties from workers, via contracts.

The legislation is deceptively simple. Some seven clauses required to determine whether an end client is “small” and then a simple definition of fee payer. It’s too simple. Even when combined with the public sector legislation already on the statute book, it leaves much scope for promoters of tax avoidance schemes to insinuate themselves.

Our primary concern over this reform – as we indicated in our response to the consultation – is that this reform will re-create conditions seen when IR35 first appeared and which led very shortly after to the rise of the loan schemes. Nobody needs reminding that for many contractors that was a disaster. Unfortunately, we see nothing in the proposed legislation that will prevent end users exploiting their position – for commercial but at least honest – reasons; nothing that will prevent agencies from protecting their preferred supplier status, stifling competition and forcing onerous contract terms on contractors.

The next few months will be a telling period for contractors. The proposals will likely take effect for all payments made after the 6th April 2020 start date. “Payment” is a term that can have many meanings, but if one of those is ‘transmission of money’ and you are operating perhaps 2 or 3 months in arrears, then the contract impacted could be one that you have in January 2020.

After more than 2 years of speculation, we now know that all the efforts of the lobbyists have been for naught. Now is the time to be realistic and to consider carefully your situation both this year and over the coming years. We are sure that there are predators waiting to strike and certain that end users and their agencies will be looking to de-risk their positions. You can permit this to happen or you can take some control of your own destiny here.

WTT will be publishing a “game plan” in the next couple of weeks (at the 27th July seminar) and it will have a range of actions that you can take and/or consider.

In the meantime, we will undertake a more detailed review of the legislation and piece it together and you should look out for more information soon.