Government publishes IR35 reform review

18 March 2020

See BDO's Off-payroll labour tools

Following the announcement of a review by HM Treasury into the forthcoming IR35 changes, the report of that review has now been published.

Despite speculation to the contrary, the most important point is that the changes will be going ahead from 6 April 2021 in respect of services provided by individuals via personal service companies (PSCs) on or after that date. The Government estimates that the reforms will lead to increased overall Exchequer revenues by £250 million in the first 12 months, achieving more than the level estimated at Spring Budget 2017.

For businesses and organisations potentially impacted by the changes it has been confirmed that HMRC will not raise penalties for errors relating to obligations under the changes in the first year, except in cases of deliberate non-compliance.

Furthermore it has been clarified that wholly overseas organisations with no UK presence will be excluded from having to consider the rules. The obligation to determine whether an employment would be deemed and the obligation to operate PAYE/NIC will remain with the PSC where the end client is ‘wholly overseas’. The legislation, including the definition of ‘wholly overseas’ will be updated to reflect this.

Further clarity around the definition of ‘small’ businesses outside the scope of the IR35 reforms will also be included in the legislation. In particular, there will be a legal obligation for end clients to respond to a request for information about their size from the agency or worker creating a duty on businesses to confirm whether or not they are ‘small’ to prospective contractors.  

To assist businesses, organisations and contractors meet the compliance obligations arising HMRC will publish further guidance. In particular it has been confirmed that further guidance on matters such as the client-led status disagreement process, including by making explicit the time limits within which a disagreement can be raised will be issued. It is hoped that the guidance on whether a company is small or not is also updated as these rules can be quite complex in marginal cases with the possibility of some companies getting it wrong.

HMRC has already published resources to assist with communication of the changes for large and medium sized businesses, public bodies, and charities to share with their contractors. Separately HMRC are undertaking one-to-one support to more than 2,000 of the UK’s biggest employers, writing directly to 43,000 medium sized businesses and other organisations, holding 18 workshops with small tax agents, recruitment agencies, charities and public bodies as well as holding 14 webinars with small tax agents, recruitment agencies, charities, public bodies, and contractors.

In terms of guidance already provided, HMRC have stated that the user feedback received on the Check Employment Status for Tax (CEST) tool has been largely positive. The report notes CEST was tested rigorously against known case law and settled cases and HMRC will stand by its results if it is used in accordance with its guidance. Where end clients confirm they agree with the output provided by CEST, the output can be used as a status determination statement. Therefore, CEST is viewed as an important tool in determining whether employment would be deemed and the report also considers this in the context of blanket assessments. Read more on the recent update to CEST.

Beyond a commitment to publish further guidance on the need to take reasonable care, the Government will take no further action on blanket assessments. In the case of companies confirming they will not use PSC contractors going forwards, the report notes that the Government “has not seen any evidence that this indicates an overall change in demand for the services and skills that contractors offer” and “independent research on the impacts of the reform in the public sector showed that it did not reduce market flexibility or impact use of contingent labour”.

Finally, with regards to contractors historic position, the report reiterates HMRC’s previous commitment that information resulting from changes to the rules will not be used to open new investigations into PSCs for tax years prior to 6 April 2021, unless there is reason to suspect fraud or criminal behaviour.

Overall, this report is useful in focussing attentions ahead of the changes in April 2021. This is especially the case because feedback reported mixed levels of business readiness. The Government heard evidence that for large businesses preparations were underway for April 2020, but medium-sized businesses reported lower levels of readiness. It was also noted that businesses and agencies raised concerns about low levels of awareness amongst contractors and were finding it difficult to reach out to this population.