On 11 July 2019, the Government issued the draft Finance Bill 2019-20, and a response to the second consultation feedback received from a wide range of interested parties. Here, Chris James, Head of Accounting at JSA and Chair of the FCSA, explains what this means to recruiters and contractors alike.
As expected, the draft Bill includes provisions to translate the off-payroll rules operating in the public sector to the private sector from April 2020, so that the decision on the status of assignments moves from the contractor and their PSC, to the end user. It will take legal experts some time to decipher the various provisions in the draft, but at this stage it’s still possible to identify some key differences between the original legislation and that proposed, including:
- A ‘small business exemption’ for end users. As a result, HMRC only expect around 70,000 end user businesses to be affected. However, this they believe will capture the vast majority of the PSC workers who do not, in their eyes, operate the existing IR35 legislation properly. (But don’t forget, even HMRC don’t believe that the majority of PSCs should be ‘inside’ IR35, just that not enough currently treat themselves that way.)
- Increased requirements for information flow up and down the chain.
- An end-user led disputes process (which frankly, doesn’t add much).
- A stronger method for the liability transferring back up the chain from the fee-payer towards the end user, via the top agency in the chain.
I currently have strong concerns about parts of the changes. Like most people, I don’t claim that the current IR35 rules work perfectly. However, these changes, especially when rolled out concurrently alongside Brexit and the disruption that will inevitably bring, are a recipe for material business impact at a time when UK Plc is trying hard to attract and retain business here. We’ll prepare for the changes to come in, but meanwhile we will try to lobby Government around the appalling timing of these needlessly rushed changes.
While attending the ‘Stop the Payroll Tax’ event at Parliament last week, it was reassuring to see how quickly those MPs who attended understood the impact of the unintended consequences of this legislation. We’ll continue to make these points to them and to the UK business community, between now and the next budget – whenever that falls.
Small Business Exemption
The small business exemption is particularly difficult. Small end users can engage contractors as they do now, and those contractors will have to apply ‘old’ IR35 as they do today. The Companies Act rules have been used, but with tweaks to try to stop abuse (for example, a large end user cannot just set up a ‘small’ subsidiary and engage through that). However, Ministers have decided that rather than have small businesses be required to confirm their small status, the supply chain should assume that if an end user does not supply a determination, then that means they are exempt due to size, and the chain proceeds on that basis.
Why, we asked at an HMRC briefing on Whitehall on Thursday, does the law not simply require a small end user to confirm their size exemption? This would give certainty to the chain (i.e. determination received – use new rules, size exemption received – use old rules). The answer – that ministers wanted to prevent an onerous burden for small businesses. I simply don’t agree – small businesses know they are small (their accounts have to say so) and the absence of certainty means that PSCs (who are of course – the smallest of small businesses) have to operate in no-man’s land while they wait to see if a delayed determination will arrive, or if a communication breakdown elsewhere in the chain has misled them. By which time, a costly status assessment may have been made, or a rate agreed without clarity on how it will be taxed, or whose job it is to tax it. This is highly unsatisfactory in the real world.
Rules around liability transfer are also fraught with difficulties. Firstly, an end user or top agency in the chain can end up with liability, even where it did everything right. This flies in the face of natural justice. We were told by HMRC that the rules have been drafted broadly so that transfer is possible, but that they would not try to use them unless there has been flagrant, organised abuse. That won’t give much comfort to flexible supply chains.
In addition, agencies trying to break into the sector and grow and accumulate value will have two challenges – first, that it will be easy for large agencies in some situations to elbow away smaller competitors, as HMRC will only go after end-users when the top agency has not settled a liability claim. Therefore, large agencies will say: ‘use us to insulate yourself against liability’.
Secondly agencies (and end users) will have to monitor every supply chain they are a part of for years, watching for any businesses ceasing or merging or closing for any reason, as this could increase the chance of a claim in the future – and a possible contingent liability – for a long, long time. At the very least, those selling successful agencies may find themselves signing increase warranties against these liabilities; liabilities that could arise despite the business complying as far as humanly possible with the legislation.
Preparation for supply chains
In the meantime, supply chains need to prepare.
- In simple terms, the contractor workforce needs to be identified and then the likely IR35 status of the different parts of it assessed. Then, decisions need to be made about which parts need to work in a different way, and if so, what budget will be available to pay for it.
- This will drive the action plan – if working practices or contracts need to change, this should be done in H2 of this year – after the lawyers have had a careful look at this new law. It will be sensible to consider all options to cope with this disruption, and to ensure expertise exists across organisations to ensure non-compliant models such as loan schemes do not get used instead of full tax payroll solutions, where these are necessary.
- New processes will be needed also for business as usual after the changes come in – each new assignment, and extension or variation will need to be reassessed – who’s going to do that – and who will bear the cost? How will your supply chain evidence the transfer of information, in and out of your business, needed to minimise the chances of liability ending up at your door?
- And communication plans will need to be prepared. End-users (end clients) and recruitment businesses should be talking as soon as possible, and contractors will want to talk as they wake up to the issue, if they haven’t yet. As ever, agencies and other intermediaries will have the hard job of communicating with contractors before they have the answers the contractors need – as the agencies will in part need to wait for a steer from those end-users.
HMRC have promised practical, useful guidance alongside the new rules, along with developments or improvements to the CEST tool. Business will certainly need it, if, as suggested in the impact assessment produced as part of the release, businesses should feel no significant economic impact. Frankly, it’s very hard to see how.