Budget Update: T&S legislation confirmed…and changes to IR35 too!

 

As you’re no doubt aware, George Osborne gave us his 8th budget yesterday afternoon. Nothing new to report on the Travel & Subsistence (T&S) side of things; as expected the changes are going ahead as planned and restrictions on access to T&S for workers engaged via an employment intermediary will begin on 6th April 2016. Over the last few months I’ve witnessed a significant increase in Limited company incorporations as a consequence of these changes, and I now expect this trend to continue as contractors lose interest in the umbrella option due to the removal of its tax advantages. Of course, the umbrella model won’t disappear altogether; not everyone will be suited to trading via their own Limited company, and many umbrella workers (typically 40-50%) don’t claim tax relief on expenses anyway, and as such will be unaffected by the new changes.

Of much greater interest in yesterdays’ budget was the announcement that we’ll be seeing a reform of the intermediaries legislation (IR35) with respect to engagements in the public sector. I expected an announcement concerning a review of IR35, but what I didn’t expect was that the review would be limited to work done in the public sector and would not impact upon PSC’s operating in the private sphere. As a quick aside, I do suspect that this focus on the public sector is merely “part 1” of an ongoing review that will see changes to the implementation of IR35 for all PSC workers. But if that is the case, then by choosing to restructure IR35 in such a way that its impact is only felt bit-by-bit, then we essentially have a situation where two different PSC’s could get treated differently with respect to IR35 simply because one works in the public sector whereas the other workers in the private sector. Even if the roles were identical with respect to the working practices, we could expect to see IR35 status discrepancies between the two PSC’s simply as a consequence of the differing levels of client and agency involvement. I’m don’t think that this sort of discrepancy will lead to fairness in the tax system, and (at least in the short-term) it doesn’t appear to create the “level playing field” that HMRC tell us they’re striving for. For the sake of fairness, I would have preferred to see a wholesale review of IR35 that would impact all PSC workers in both the public and the private sectors.

We don’t know too much yet about what the reform of IR35 for public sector PSC’s will look like, but thanks to the “Technical note” that was released yesterday (please find the link at the bottom of this post) we do know that HMRC intends the following:

  1. IR35 will be reformed with respect to PSC’s working in the public sector.
  2. The public sector is defined as organisations that are classed as “Public Authorities” for the purposes of the Freedom of Information Act (2000) and the Freedom of Information Act (Scotland) 2002.
  3. The public sector reforms of IR35 will mean that it will no longer be the responsibility of the individual working through the PSC to determine their IR35 status. Instead the responsibility for determining IR35 will be with whichever entity sits next to the PSC in the supply chain (so that could be the client themselves or a recruitment agency)
  4. In instances where IR35 applies, the entity that sits next to the PSC in the supply chain would be required to collect the appropriate employment tax (Income tax) and National Insurance contributions. This will mean that the entity sitting next to the PSC will need to obtain all the necessary personal, company and tax information needed to operate RTI from the workers PSC.
  5. HMRC will be providing simplified guidance and a new digital tool that will allow agencies and clients to accurately determine whether or not the PSC will be caught by IR35

I must stress that we’re at the very early stages in all of this; we haven’t yet got a formal consultation proposal and things will likely be tweaked between now and the publication of that consultation document, and then tinkered with some more as a result of the consultation process itself. So the actual legislation that’ll be introduced in 2017 could have a considerably different feel to it than what’s presented in this technical note. One thing that is conspicuous by its absence in the technical note is any mention of a debt transfer back to agencies or clients in the event of an IR35 assessment error. Given HMRC recent use of such debt transfer models, I would be surprised if they didn’t include on here.

I shall be involved in the consultation process later this year and will keep you up to date on the developments.

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/507978/M1007_Tech_Doc_FINAL_V3_0.pdf

Posted by Wesley Scott on March 17th, 2016

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