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HM Treasury has dismissed calls for the delayed start date of the IR35 private sector reforms to be deferred beyond April 2021, despite a government inquiry concluding that the changes are too problematic to proceed as planned.
The reforms, which were originally due to come into force on 6 April 2020, were recently the subject of a Finance Bill Sub-Committee probe, which included input from a number of stakeholders from across the contracting community.
Over a series of evidence sessions throughout February 2020, the inquiry heard feedback about a number of challenges that contractors and freelance workers have encountered as private sector firms within the scope of the reforms have prepared for their introduction.
This is because the reforms will see medium to large private sector firms assume responsibility for determining how any contractors they engage with should be taxed, based on the work they do and how it is carried out.
Currently, and with the roll-out of the reforms delayed until April 2021, it is down to contractors to self-declare their tax status, in terms of whether or not the work they do means they should be taxed in the same way as salaried employees (inside IR35) or as off-payroll workers (outside IR35).
In the government’s view, this system of self-declaration is in need of reform because it is open to abuse by individuals who may choose to deliberately mis-classify themselves as working outside IR35 in order to minimise their employment tax liabilities.
In a four-page letter to Jesse Norman, financial secretary to the Treasury, Lord Forsyth of Drumlean, chairman of the Finance Bill Sub-Committee, said the decision to defer the reforms – in response to the Covid-19 coronavirus outbreak – was appreciated.
However, he said it is the committee’s view that the roll-out of the reforms should have been subject to a delay regardless of the pandemic, and postponed until a number of issues referenced in the letter regarding the reforms are addressed.
“Our witnesses had a number of material concerns about the proposed changes,” said the letter, which was publicly posted on 17 April.
“Had the outbreak not occurred, the sub-committee would have argued that the reforms should be delayed, and we now urge the government to postpone the eventual implementation of the new rules until it resolves the difficulties that we have identified.”
These “difficulties” include the unforeseen costs involved for private sector firms in their pursuit of compliance with the reforms, with the letter citing anecdotal evidence, shared during the inquiry, that preparing for the changes had saddled six private sector firms with a bill totalling £3m.
It also referred to the challenges contractors have faced in the run-up to the reforms, as the companies they engage with have sought to achieve compliance by banning the use of limited company contractors, or making blanket determinations about their tax status.
In instances where private sector firms have introduced blanket bans on limited company contractors, individuals are often told the only way they can continue working for the firm is through an umbrella company.
Such entities take care of the administration and accounts work these individuals would previously have done while operating as a limited company contractor in exchange for a fee, and the umbrella company also assumes responsibility for invoicing the contractor’s client, ensuring the correct tax deductions are taken from their salary.
However, umbrella companies are largely unregulated and, while there are many reputable firms that offer these services, a number of others are linked to disguised remuneration and tax avoidance schemes.
“Several witnesses recommended that the proposed reforms should not be implemented without stronger regulation of umbrella companies,” the committee’s letter stated.
For this reason, it asked Norman about the steps the Treasury is taking to protect individuals from non-compliant umbrella companies when the IR35 rules are extended to the private sector.
The letter also posed a number of other questions to Norman and his department, including whether or not the government is of the view that businesses will have recovered sufficiently from the economic issues caused by the coronavirus to deal with the “additional burden” the reforms will impose on them.
Read more about IR35 in the private sector
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Norman issued a response to the letter on 9 April, although its contents was only made public two weeks later, that said deferring the start date of the reforms beyond April 2021 is not an option.
“This is a deferral of the introduction of the reforms, not a cancellation,” Norman wrote. “The changes will be legislated in the current Finance Bill, and will be implemented from 6 April next year.
“Postponing the reform further would prolong both this unfairness and the disparity between the private sector and the public sector, where the reforms have been in place since 2017.”
The government has suggested in the past that the reforms would generate £3bn in previously unpaid tax revenue by the 2023-24 tax year, but Norman, in his response, suggested that these figures have since been revised upward, claiming that the changes are on course to net the Treasury £4.1bn by the 2024-25 tax year.
In response to the concerns raised by the inquiry about the implications of contractor bans, Norman reiterated previous comments on this matter, stating that the government is aware of the issues, but has not seen “any evidence that this indicates an overall change in demand for the services and skills that contractors offer”.
On the topic of blanket determinations, Norman said “the government has been clear” that assessments should be carried out on a “case-by-case” basis and said he would be happy to receive “validated evidence” that suggests this is not occurring.
One area where Norman said the government is committed to taking action is on non-complaint umbrella companies, which he said is acknowledged as being a “strategic risk” in the HM Revenue & Customs (HMRC) Compliance Plan.
“HMRC has a significant number of non-compliant umbrella companies under enquiry, which are confidential,” he wrote. “An number of umbrella companies HMRC has challenged have already paid up and ceased trading. Others face litigation if they fail to pay tax due on their failed schemes.
“HMRC will continue to monitor the role of umbrella companies by ensuring the Employment Agency Standards Inspectorate works closely with HMRC and the Gangmasters and Labour Abuse Authority to identify any further enforcement or regulation required to tackle abuses.”
But for now, the plan to extend the IR35 reforms to the private sector in April 2021 still stands, with Norman making the point that the government has announced a package of measures to support businesses through the Covid-19 outbreak, so that should be no barrier to rolling the changes out.
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