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HM Revenue & Customs (HMRC) wants the private sector to start preparing now for the arrival of the IR35 tax avoidance reforms in April 2020 by undertaking a review of their back-office IT systems for compliance reasons.
The government tax collection agency has opened a consultation, which runs until 28 May 2019, to canvass views from assorted contracting stakeholders about how best to implement the reforms.
The accompanying consultation document carries details of the support HMRC said it plans to offer private sector firms affected by the reforms to help them get to grips with the changes.
It goes on to urge firms to start preparing now for the new-found responsibilities the reforms will place upon them.
This is because, from next spring, all private sector businesses – apart from small and medium-sized enterprises (SMEs) – will assume responsibility for determining whether the freelance staff and contractors they engage with should be taxed in the same way as salaried employees (inside IR35) or off-payroll workers (outside IR35).
At the moment, it is up to contractors to self-declare whether the engagements should be classified as inside or outside IR35, which determines whether or not they should be exempt from having to make PAYE tax and national insurance contributions.
HMRC said it is planning to create an “education and support” package for private sector organisations affected by the changes, so they can start preparing for the changes well ahead of the April 2020 launch date.
“The government understands that many organisations will be keen to begin preparations and has therefore included in the education and support section of this document actions that affected organisations can take now to prepare for the reform,” the document says.
The section sets out details of who within an organisation will be responsible for assessing the tax status of any contractors they engage with, before advising firms to start undertaking a multi-pronged review of their existing contractor arrangements.
It also advises firms to review their internal IT systems, particularly HR and payroll, to see if there are any changes that need addressing to bring their systems up to code.
As previously reported by Computer Weekly, the Association of Accounting Technicians (AAT) has previously warned that it could take at least one full tax year for back-office software suppliers to make their systems IR35-compliant.
Preparing for launch
Seb Maley, CEO of IR35 tax advisory Qdos, said private sector organisations should heed the government’s advice to start prepping for the reforms now in readiness for a repeat of the issues that blighted the roll-out of similar changes to the public sector back in April 2016.
These included reports of contractors exiting government IT projects over disputes about their tax status, and organisations resorting to making “blanket determinations” to cope with the additional administrative burden the changes imposed on them.
“As part of the IR35 consultation, the government promised to review the true impact of public sector reform,” said Maley. “However, it still sees increased tax revenues as a sign of success and increased compliance.
“The thousands of contractors who have been forced inside IR35 without a fair assessment of their working arrangements and have therefore been overtaxed no doubt beg to differ.
“Given that public sector reform has not been a success, the information released today makes it all the more important that private sector companies prepare for reform immediately and do not wholly rely on the taxman for support.”
The consultation document also flags the existence of HMRC’s much-maligned Check Employment Status for Tax (CEST) within the “education and support” section of the consultation, as a service they can use to determine the tax status of their contractors.
The document confirms that changes to how CEST works will be required before the private sector reform proceeds, and it also refers to the fact that several contracting stakeholders have taken issue with the accuracy of its responses.
“HMRC is currently working with stakeholders to deal with these concerns,” says the document. “HMRC is looking to enhance the service to help customers make employment status decisions and improve CEST guidance so that organisations can confidently make employment status determinations that people working through intermediaries will be able to see and understand.”
Read more about private sector IR35
- The Association of Accounting Technicians cautions HM Revenue & Customs against rushing out IR35 reforms to the private sector, claiming it will take most businesses at least one tax year to ready their software systems for the move.
- Extending the IR35 tax avoidance reforms to the private sector risks hampering the flexibility of the UK’s IT workforce, research from ContractorCalculator has suggested.
Dave Chaplin, CEO and founder of IR35 and tax consultancy ContractorCalculator, said that in the light of the issues public sector organisations are still finding when using CEST, significantly ramping up the number of people who will have to rely on it is a foolhardy move.
“The BBC, which is just one company, has said that after two years of dealing with off-payroll, they are still having major issues with employment status,” said Chaplin.
“The BBC is blaming HMRC for its flawed CEST tool, and HMRC is blaming the BBC for its assessment processes, abnegating all responsibility for the mess at the broadcasting corporation.
“How are firms going to assess the employment status of over 500,000 personal services company workers accurately, starting next month for those entering 12-month contracts.
“Time and time again, we have told HMRC that rolling out the reforms is going to be hugely damaging for UK plc, but our warnings, and evidence to prove it, have fallen on deaf ears.”
The government’s decision to extend the reforms to the private sector has proved controversial, with the Association of Independent Professionals and the Self-Employed (IPSE) among those who have repeatedly spoken out about it.
IPSE has confirmed it will be contributing to the government’s consultation, with its deputy director of policy, Andy Chamberlain, reiterating the organisation’s view that the reforms could have dire consequences for the UK’s flexible workforce.
“This is an astonishingly myopic move,” he said. “The UK’s greatest competitive advantage is its flexible labour market. This proposal will dramatically restrict that flexibility and starve UK businesses of the freelance talent they need to get work done.
“Pushing ahead with this during Brexit will hamstring freelancers and their clients when the country needs them most.
“Brexit uncertainty has already driven freelancers’ confidence to an all-time low. The last thing they need now is heavy-handed legislation suffocating their sector.”