IR35 proposal: How will you get paid in April 2017?
The HMRC proposals for changes to IR35 assessment in the public sector has drawn a lot of bad press in the freelance and contractor arena since their announcement in the summer. JSA’s Head of Accounting Operations, Chris James, explains another elephant in the room, which HMRC really need to deal with fast: many of the affected workers won’t be able to get paid in accordance with the proposals in April 2017.
HMRC’s proposals for reform of the operation of IR35 in the public sector has, it’s fair to say, received a negative response from most, if not all, interested parties. The objections are many and varied; the ‘unfairness’ of taxing freelancers in a similar way to employees, while not conferring any of the accompanying employment rights; concern over applying the rules to the public sector only when many workers can simply migrate to the private sector; possible reliance on a status assessment tool that is not yet written; and the passing of responsibility for complex status assessment to Agencies, who generally don’t have and don’t want to have the capability to carry out this work. They are, let’s not forget, primarily sales businesses.
But ignoring all that (for a moment) there’s also another, pretty important mechanical problem. The proposals require that where a status assessment has been carried out, and a public sector worker is deemed caught by IR35, payments to that worker have to be made after the deduction of payroll taxes, in line with the long-standing IR35 prescribed calculation model. The paying entity (agency or end user) will be required to pay those deductions to HMRC, and submit payroll deduction information via RTI. This information will not be about an employee of course, because the worker is not an employee. It will be payroll information about a payment for an invoice. Is this starting to sound confusing? It should.
The worker’s company, the "Personal Service Company" (PSC), will of course have its own payroll. It would be required to run a payroll (assuming it agrees with the assessment of employment status) which would broadly replicate the calculations made by the paying entity, and submit its own RTI data. Then all HMRC has to do is marry the two sets of data up, only chase the paying entity for the liabilities, and then deal with any reconciling items at the end of the year.
Some readers may feel that their experience of HMRC’s ability to deal with PAYE reconciliations and related matters doesn’t fill them with confidence in the face of these proposals. However, this may not be the most immediate problem, as we don’t believe that it will be possible to make the payroll submissions from the paying entity at all, and certainly not by April 2017. Furthermore, the paying entity’s payment software will not (without manual intervention) be able to calculate the appropriate deductions in any case.
In order to do what the proposals require, a paying entity will have to calculate the deductions that apply using their supplier payment system. This system will also have to make RTI submissions, or the entity’s payroll system will need to make submissions for ‘dummy’ employees, keeping them clear of the main reporting for their genuine payroll. Currently, no payroll software producer that we can find has developed this capability. Furthermore, they say that it would take twelve months or thereabouts to meet this requirement, and that they’ll wait for the legislation before carrying out this work (which, to be honest, you can understand). Finally, and critically, all of the developers I’ve spoken to say that they’ve told HMRC this in no uncertain terms.
I find this at odds with what I’ve been told at more than one ‘"roundtable" discussion with HMRC by members of their IR35 policy team. In response to us tabling the specific question, they say that they are working with developers and that they (the developers) are confident of meeting this requirement. The same developers are telling us that they have explicitly told HMRC that it cannot be done: It will take a year, and they haven’t started.
Alongside the obvious concerns that the online status assessment tool will be released too late to be fit for purpose, this suggests that HMRC need to take another look at the timetable for these changes at the very least. Uncharitable commentators take the view that HMRC don’t see this as a problem because they anticipate wide-scale treatment of workers as caught – moving most of these to either in-house PAYE or umbrella-based payroll solutions – driven by agencies and end users unable or unwilling to class their workers as anything else.
But, no doubt, some contractors will be working through their companies inside IR35 after the legislation is scheduled to kick in. Contrary to what HMRC appear to believe, some workers have a long history of classifying themselves as caught, and working through their companies in a compliant way, paying their tax as they go through payroll. HMRC needs to explain to them and those of us advising them, how they will get paid for an invoice in April 2017.
HMRC say they want to get their own house in order before the question of rolling this legislation out to the private sector is discussed at some point in the future. I would recommend they first speak to the software developers, and find out if an April 2017 launch is even possible.
Chris James is an IPSE accredited Chartered Accountant. He is Head of Accounting Services at JSA Services Limited, which provides accounting, payroll, umbrella and business advisory services to small businesses, contractors and freelancers across the UK.
Tax, Policy, ir35