A close look at the draft IR35 legislation

A close look at the draft IR35 legislation (off-payroll working rules)

The long-awaited draft legislation for IR35 reform in the private sector was published on 11th July, as HMRC outlined the specific plans for the April 2020 changes.

As expected, HMRC did not introduce anything groundbreaking into the proposed legislation, a similar version of which has been in force in the public sector since 2017.

Aside from the notable exemption of small companies from next year’s reform, HMRC intends to include several other tweaks to rules, which will result in medium and large private sector firms becoming responsible and often liable for IR35.

To help you better understand the details of incoming IR35 changes, which will also be added to the public sector rules, in this article we have taken a detailed look at everything.

As expected, small companies will be exempt

HMRC confirmed in the draft legislation that companies meeting the taxman’s definition of ‘small’ will remain exempt from further IR35 reform. This means that firms that meet two or more of the following criteria, will not need to administer IR35 upon the arrival of changes. A ‘small’ company can be defined as a business that does not have a turnover above £10.2m, a balance sheet total of no more than £5.1m or no more than 50 employees.

Introduction of status determination statement

HMRC announced a new ‘status determination statement’, which means end-clients must provide a statement which says whether or not it believes IR35 applies to both the contractor and the party directly engaging the workers - which will often be the recruitment agency - as well as the reasoning behind the decision.

Until this is provided, the end-client will be classed as the fee-payer and responsible for deducting the appropriate tax and NIC from the contractor before paying this to HMRC.

This could be seen as an attempt from HMRC to stop blanket determinations, which in the public sector, have resulted in thousands of contractors being placed inside IR35 as engagers attempt to protect their liability.

Client-led disagreement process confirmed

The taxman provided details of a client-led disagreement process, which in theory has been designed with the aim of giving contractors an opportunity to overturn what they view as inaccurate determinations.

How this will work in practice has not yet been fully explained, but the draft legislation states that if a contractor disagrees with an IR35 decision, the end-client has 45 days to respond and must provide its reasons for the original determination.

It will also be required to either confirm or change its decision and, if necessary, provide a new status decision. If the end-client fails to do this, they will then become the fee-payer, meaning the IR35 liability will transfer to them, assuming they don’t carry it already.

Concerningly, there is nothing in the draft legislation that states what could happen if the contractor still disagrees with the status decision after the initial appeal. Although, it is clear that HMRC does not want to be involved and isn’t interested in setting up an independent body to oversee the appeals process.

‘Reasonable care’ still up in the air

In due course, HMRC is expected to publish supporting guidance to clarify the steps they expect medium and large engagers and recruitment agencies at the top of the supply chain to take, in order to demonstrate that they have taken ‘reasonable care’ when setting IR35 status. Qdos has regularly made the point that a clear definition of ‘reasonable care’ could be vital in stopping blanket determinations.

As of yesterday, a further consultation on the draft IR35 legislation has now opened, with a deadline of 5th September 2019. Qdos will be providing a response.

In supporting contractors, Qdos strongly disagrees with the incoming changes. We do not believe it is a necessary or fair course of action for HMRC to take. That said, through the work we are carrying out with more than 50 private sector companies, we are confident IR35 reform can be managed.

Looking ahead following the publication of the draft legislation, the private sector companies that will soon be tasked with administering IR35, along with the agencies that could soon carry the liability, can at least start preparing for these changes on the basis that at this stage a U-turn or further delay seems very unlikely.