The shift in IR35 liability no one called for
One of the most troubling aspects of the government’s plan to reform IR35 in the public sector is the shift in who has responsibility for determining whether IR35 applies. Until now it has always been the freelancer business. However, from April 2017, the government wants the responsibility to move to the public sector body or agency paying the freelancer’s company. IPSE believes this will cause major difficulties for all concerned.
Engagers will not be able to determine whether IR35 applies
As has been stated by IPSE and many others hundreds of times, IR35 is incredibly confusing. It is impossible to determine with any degree of certainty whether it applies to any one engagement, as HMRC has frequently discovered to its cost.
Historically HMRC has felt certain that IR35 does apply to a particular engagement, only for a tribunal to disagree –examples include Primary Path Ltd, ECR consulting Ltd, MBF Design Services Ltd and Marlen Ltd. If HMRC, with all the expertise and resources it has, cannot make a correct judgement on IR35 status, how are public sector bodies or agencies that have no knowledge of the day-to-day characteristics of the engagement going to cope?
Engagers have no IR35 expertise whatsoever. They will have no way of knowing whether it applies or doesn’t. Saddling engagers with such a burden creates a huge additional responsibility and one they will be ultimately unable to fulfil.
Despite this, the proposal assumes public sector clients and/or agencies will take a considered view on whether IR35 applies to each individual engagement. Where the client is a comparatively small organisation, engaging one or two “Personal Service Companies” (PSCs), this might happen. Larger organisations, however, which engage hundreds, maybe even thousands, of PSCs at any one time, will not consider engagements individually. To do so would incur a huge administrative effort that they do not have the resources to take on.
Public sector bodies and agencies are risk-averse
Clients and agencies will take a holistic approach to IR35. They will say either that the new rules apply to all engagements, or none of them. Both clients and agencies are considerably more likely to say the rules apply, as this will remove the risk of non-compliance.
Public sector organisations are risk-averse. They do not want to run the risk of incorrectly determining the status of an engagement, only to then be liable for tax further down the line. As they cannot know with any certainty whether IR35 should apply – due to its inherent uncertainty – they will have no choice but to determine that all engagements are outside IR35 rules.
For agencies this problem is compounded as they will have no knowledge of the day to day working practices of the engagement, upon which IR35 status is determined. They are at arm’s length from the engagement. They are not on site and are not able to observe the interactions between the PSC and the client. There is, as far as IPSE and many other business groups can see, no conceivable scenario in which an agency will feel comfortable signing off an engagement as being outside IR35. Compliant agencies will have no choice but to determine that all engagements are within IR35.
In attempting to tackle ‘disguised employment’, this measure will create the opposite problem – ‘disguised self-employment’
This will result in the creation of ‘disguised self-employment’: where the engagement will be one of self-employment, but will be taxed as if it were employment. Ultimately, the IR35 status decision being made by the client will lead to fully tax compliant public sector bodies, agencies and PSCs, paying incorrect amounts of tax.
HMRC research shows clients do not want the liability for determining IR35
As you would imagine, IPSE has told HMRC all this. We have told them at face to face meetings and spelled it out in detail in our consultation response. Curiously though, we didn’t need to - they already knew. Midway through the consultation period HMRC published Intermediaries Legislation Qualitative Research.
The paper outlined the results of qualitative research undertaken by HMRC, with IPSOS Mori last Autumn. It found engagers would not want IR35 liability to shift to them because:
- Administrative burdens will increase – engagers would have to bring in processes to check the tax circumstances of all ‘temporary staff’. This would require new systems to be introduced which would have time and cost implications.
- Costs will be incurred – In addition to admin costs, engagers are concerned they’d be forced to employ more staff which would cost them more (as they would have to give them employee benefits). Ultimately, they may have to let some people go to keep costs down.
- Engagers will take a risk-averse approach – Clients will automatically put people on the payroll rather than risk non-compliance (and big penalties).
So HMRC are pushing ahead with a proposal which their own research tells them will result in businesses paying incorrect taxes, additional burdens being placed on engagers, and extra costs being incurred. This last point is particularly important as those costs will be ultimately met by the taxpayer, which is purportedly who this proposal is supposed to be benefitting.
If ever there was an ill-thought out proposal this is surely it. That’s why we are urging all contractors to write to their MP. We need MPs and Ministers to realise how damaging this will be – not just to the contractor businesses that ensure the successful delivery of vital public sector projects, but also to the public sector bodies themselves. We’ve provided a few pointers on what to include in your letter but we would encourage to use your own words as much as possible. For IPSE members there is a template letter available.
Please help us to defeat this damaging proposal.