Government takes action to ‘smooth’ IR35 implementation, but uncertainty remains

28 February 2020: ICAEW’s Tax Faculty has welcomed changes announced by the government to “support the smooth and successful implementation” of new off-payroll working rules, but warns that businesses are still hampered by uncertainties.

On 27 February, the government published its report detailing its review of the implementation of changes to the off-payroll working (OPW) rules which will come into effect on 6 April. The review was launched in January and stakeholders, including ICAEW, raised significant concerns about the regime’s implementation and its impact on businesses.

In its report, the government sets out the concerns and how it aims to address them, including confirming a softer compliance approach that “will not penalise businesses trying to get it right”.

The report states: “customers will not have to pay penalties for inaccuracies relating to the off-payroll working rules in the first 12 months unless there is evidence of deliberate non-compliance”.

While the Tax Faculty welcomes the changes outlined in the report, it remains concerned about areas where there is still uncertainty.

For example, one positive change is the obligation on clients of a contractor’s personal service company, if asked, to tell contractors and agencies within 45 days whether they are "small". However, the faculty remains concerned as to whether the contractor will be aware that if the client is small, it is up to them to comply with IR35.

Also, if a contractor does not receive a status determination statement (SDS), there are two possible reasons for this with very different compliance obligations. They might not have received an SDS because the client has determined that the contractor is not a deemed employee – which means that the client does not have to provide an SDS. Alternatively, it could be because the client is offshore which means that the contractor is responsible for applying the April 2000 IR35 rules. How will the contractor know which case applies to them?

If the contractor disagrees with the SDS, there is still no deadline by which the contractor must initiate the client-led disagreement process, potentially leaving the client exposed to a disagreement being raised for an indefinite period.

HMRC guidance (Employment Status Manual - ESM10015) states: “the client is only required to respond to representations made during the course of the engagement and before the final chain payment is made in relation to that engagement”, but there are no powers for this in draft legislation previously published.

Other matters announced, welcomed by the Tax Faculty as far as they go, include:

• The proportionate approach to compliance. However, if the law, detailed guidance and IT specifications had been finalised a year in advance there would be no need for this easement. As it is, the faculty awaits the final rules in the Finance Bill (due on 19 March) and secondary legislation and guidance is still being updated.
• Information resulting from changes to the rules will not be used to open new investigations into personal service companies for tax years before 6 April 2020, unless there is reason to suspect fraud or criminal behaviour.
• As previously announced, the rules will apply only to services carried out from 6 April 2020 onwards.
• HMRC has published detailed guidance on the reforms, including in ESM10000, and is further updating ESM for the review announcements. The review report notes that updates already made include adding time limits within which a client-led employment status determination disagreement can be raised.
• HMRC has published a factsheet to support contractors in preparation for the changes and will step up communications in the run up to implementation, examples being a self-help guide on how to spot tax avoidance schemes, social media campaigns and webinars, etc. As part of this, visit HMRC’s communications resource containing guidance, flow charts, case studies, etc published alongside the review report.
• HMRC will commission external research into the impacts of the reform six months after implementation, including on how status assessments are being made.

For more support on changes to the off-payroll working regime visit icaew.com/IR35.