Since the government announced in October 2018 that the IR35 public sector rules would be extended to the private sector, there has been a plethora of publications warning against potential issues.
Online HMRC CEST tool
For example there have been warnings about reliance on the CEST tool. “There is no doubt that the tool is technically flawed” says Adrian Marlowe, MD of the recruitment and employment law specialist Lawspeed, “but this does not mean the tool does not help hirers and agencies. It is provided for that purpose and it is difficult for HMRC to argue against a finding of the tool since HMRC states that it will stand by the outcome provided that information is correctly input. For this reason hirers and agencies are best advised to use the CEST tool to check wherever they believe IR35 may not apply, such as where there is a genuine project. To get an investigation off the ground HMRC would need to show that information input was incorrect. In most cases where a contract is simply skill and time based, IR35 will apply and there is no need for hirers or agencies to use the tool at all.”
Rates not affected by tax deductions
More recently there have been suggestions of problems of application as and when the public sector rules are extended to the private sector. For example that making tax deductions where an existing ‘off payroll’ contract arrangement is caught by the rules on 5th April 2020 may amount to a breach of contract. “This is not correct unless the contract terms specifically exclude any kind of deduction for tax, and I have never seen such a provision” says Marlowe. “Off payroll means ‘paid other than on the payroll’, usually to a company. Gross payments that are subject to IR35 tax rules are not varied by those rules and so even if deductions are made the payment is based on the gross contractual sum, meaning that the contractual payment is satisfied even where only the net amount is received by the contractor company.”
Transition arrangements apply to existing contracts on D day
A further example of misleading information is that the imposition of new IR35 rules part way through a contract will cause problems because the decision as to whether IR35 rules apply must be made ‘before the contract concludes’. “This is also not correct. The existing legislation allowed for IR35 decisions to be made after application of the new rules and before the next payment is made where a contract was already running. Since the issue was alive and addressed at the time of the public sector rules there is no reason to believe it will not be treated similarly under rules to be introduced in April 2020.”
‘IR35 caught’ means employment rights follow
“Perhaps even more important than these false news points”, continues Marlowe, “is the suggestion that employment rights claims will follow an ‘inside IR35 decision’. The idea that a company contractor has actual employment rights because the company arrangement is subject to IR35 tax rules does not live in the real world. Tax treatment does not affect contractual relationships or employment rights. In practice what is likely to happen is the contractor will reengage via a different contract arrangement, namely as a PAYE or worker employed by an umbrella company. In neither case would employment rights accrue against a hirer or an agency because of the tax outcome.”
Stick to real practical issues
Marlowe concluded, “These suggestions are largely emanating from the contractor community. Whilst it is perfectly commendable to challenge the government’s plans, the correct way to do so is to point to real practical problems rather than publish material that is misleading and incorrect. There is no room for scaremongering, which in our view will simply lead to a breakdown in trust of the source concerned.”
“If anyone needs advice about the rules, help or contracts of any kind we would be delighted to assist. We have advised on IR35 and provided suitable contracts for use by hirers, agencies and contractors since 2000.”
The original tax rules applied in April 2000 were absorbed into Part 2 Chapter 8 ITEPA 2003, the variations for the public sector are included in Part 2 Chapter 10.
For more information call Lawspeed on 01273 236236.