Recruiters fear “ill-conceived” changes to the rules regarding off-payroll workers will have a negative effect on the industry and could place some agencies on the wrong side of the law.
Chancellor Philip Hammond announced in his Autumn Statement that the responsibility for operating IR35 off-payroll working rules and paying the correct tax will shift to the body paying the worker’s company, potentially the recruitment agency.
The new rules mean that when a worker provides their services to a public authority through an intermediary, such as a personal service company (PSC), the person paying the fee to the intermediary will be required to determine whether IR35 applies and, if applicable, to deduct and account for PAYE/NI.
Agencies will be responsible for administering the IR35 status decision made by public sector organisations that a contractor is working for. This adds a substantial burden onto agencies to determine whether IR35 applies, operating PAYE/NI should it apply and dealing with the underlying risk of being liable for unpaid PAYE/NI, interest and potential penalties should they incorrectly decide that it does not apply.
REC head of policy Kate Shoesmith says: “We are deeply disappointed that the government has introduced these plans despite opposition across all employer and contractor groups. Our research suggests that the IR35 changes could drive highly skilled contractors and interim managers away from the public sector. Even the HMRC’s own research earlier this year indicated that this could be problematic.
“Going forward, we are keen to work with HMRC to ensure that our industry’s voice is heard. We are pleased to see that there will be an obligation on the client to tell the agency whether an assignment is inside or outside IR35. We called for this so that recruiters cannot be held liable for information they simply will not have access to.”
It is feared these changes will necessitate changes to existing contract set-ups adding to the difficultly of delivering services at a time when there is huge demand in the public sector for skills on a flexible basis.
Julia Kermode, CEO of the Freelancer & Contractor Services Association (FCSA), says there is little comfort in the announcement as there is still insufficient clarity on how the system will work when it is implemented next April.
“I suppose contractors should be pleased that the draft legislation apparently includes measures to prevent double taxation of their income from public sector assignments, which would otherwise arise from a directors fee and dividend payments.
“However, there is insufficient detail on how this will work in practice – the directors fee attracts tax and NIC at source, dividends are subject to personal tax through an individual’s self-assessment tax return and until we have more clarity on the precise mechanism we do not know if double-taxation will actually be prevented.
“As widely predicted, we are starting to see public sector hirers managing their new liability through a wholesale ban on engaging freelance professionals through PSCs; in at least one case I’ve heard of, the hirer is instead turning to consultancy firms at significantly higher cost to taxpayers.”
Kermode accused the HMRC of “ploughing ahead with an ill-thought through move and has ignored the very many stakeholders in our sector who have raised some clear and common-sense concerns”.
“Furthermore, the draft legislation does not mention how contractors can appeal a hirer’s decision regarding their IR35 status so it seems that HMRC either doesn’t anticipate any disagreements, or assumes contractors will simply accept the hirer’s decision in order to undertake a particular assignment,” says Kermode.
Dave Chaplin, founder and CEO of Contractor Calculator, an independent portal for the UK’s contracting industry, says the HMRC’s plans will throw the contracting sector into disarray, adding that its digital tool, being developed to ascertain whether IR35 applies or not, is a “naïve attempt to achieve the impossible”.
“IR35 is based on complex employment status legislation and case law that dates back to the 1960s. Even experienced IR35 experts and HMRC inspectors can struggle with the law in this area,” says Chaplin.
Patrick Ford, tax partner at Squire Patton Boggs, says: “Workers using intermediaries will obviously not want IR35 to be applied as it will reduce their take home pay (it is worth noting that a 5% tax free allowance that applies under IR35 for private sector workers will not apply to public sector workers) and public authorities will not want increased charges from the intermediary as a result.
“However, given that the IR35 test is not straightforward to apply and often not clear cut, the government is expecting agencies to take a more cautious – the government would say compliant – approach than intermediaries may have been taking prior to the new rules.
“To address concerns that an agency may not have sufficient information to apply the IR35 test, the new rules put a statutory obligation on public sector clients to provide information to the agency as to whether the IR35 test is met and absolve the agency in the event that it relies on fraudulent information provided by the intermediary or the worker.
“However, the agency still has significant exposure including where it relies on incorrect information provided by the public sector client. The government will be providing an online tool to assist agencies with applying the IR35 test but many are sceptical as to whether the tool will be reliable and effective in situations where the answer is not obvious.”
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Sourced: recruiter.co.uk