As the new IR35 rules called for clarity, HMRC has released a new briefing to provide further guidance and information on the reform for businesses struggling to take the adequate measures as deadline approaches.
Whilst the previous report led to a range of criticism, the new briefing offers a detailed range of information for businesses complying with the new rules- highlighting HMRC’s attempt to collaborate with the concerned industry professionals.
Key points from the new policy paper include:
- The government has reaffirmed its plan to introduce the new IR35 rules in the private sector by April 2020, despite calls for this to be reviewed
- From April 2020, large and medium sized organisations will be responsible for assessing the correct employment status of their contractors
- Contractors who work for small businesses will continue to make employment status decisions for their PSCs, and HMRC will support them with guidance, a helpline, and online tools.
- The government says that “this is not a new tax” – and the changes are intended to encourage compliance in existing rules
- This reform will provide £3 billion for essential public services, including the NHS, over the next 4 years.
- Reform does not prevent people from working through limited companies
- Increased support from HMRC will include one-to-one support for 2,000 of the UK’s biggest employers and direct communications to around 15,000 medium sized businesses
- An enhanced version of the ‘CEST’ tool will be released before the end of the year
Following the publication of the report, Susan Ball, Employer Solutions Tax Partner at RSM commented: “Today’s announcement is encouraging in that HMRC is being proactive in seeking to engage with affected businesses to help them understand and implement the new rules correctly. However, we remain concerned that HMRC will not necessarily know about all the businesses in scope, and there is a risk that some will fall through the gaps.
“We also look forward to the launch of the new CEST tool before the end of this year, which should help reduce the confusion and errors that we have seen in employment status determinations to date. It is pleasing that HMRC have confirmed that if you use the current version they will stand by the decision if it is completed correctly.”
The IR35 rules were initially designed by HMRC to ensure that individuals working like employees, but through their own limited company (or certain other intermediaries such as LLPs), pay broadly the same tax and National Insurance contributions as those who are employed directly.
Previously, the responsibility for assessing employment status rested with the contractor in the private sector. The new rules, due to come into force in April 2020, imply that large and medium-sized organisations will become responsible for assessing the correct employment status of the contractors they engage to work for them, as the public sector does now.
A comfort to contractors
The report also comes as a relief for contractors whilst HMRC shared it will only use information resulting from these changes if it suspects fraud.
Ball explained: “Today’s statement also provides some, albeit, limited comfort to contractors who have been worried that HMRC could look to open new enquiries into past tax disclosures as a result of these changes.
“HMRC has now indicated that they will only use information resulting from these changes to open new enquiries into previous years if there is reason to suspect fraud or criminal behaviour. However, the statement is slightly ambiguous and is not entirely clear on what this would mean in practice when people perhaps previously haven’t applied the rules correctly.”
In response to HMRC’s decision, Dawn Register, Partner in Tax Dispute Resolution at BDO, said: “Initially, HMRC has said it would not investigate a contractor’s employment status from previous years, but this week, HMRC said confirmed that it may do, if it suspects there has been “fraud or criminal behaviour”. Contractors will now be keen to know what could arouse such suspicions.
“For example, if an individual who is reclassified after April 2020 has only worked for one business for some time but has not applied IR35, HMRC might feel entitled to “suspect fraud” if it becomes aware of the facts. It would then be up to the individual to prove otherwise. This is particularly relevant if the individual used a professional adviser to complete their past tax returns.”
To avoid any suspicion of fraud, Register advises contractors to assess their tax position well before the deadline.
He said: “I would recommend that any contractor in the private sector should seek professional advice well in advance of April in order to fully assess their current and past tax position. Otherwise they could risk a very nasty multi-year tax enquiry in the future.”