IR35 reforms: HMRC defends off-payroll rules guidance against "woeful" IPSE jibes

The government’s latest advice on how private sector firms should prepare for the April 2020 roll-out of new IR35 tax rules is “woefully short” on details, says the industry body that represents contract workers.

HM Revenue & Customs (HMRC) published its IR35 guidance document on 22 August 2019 to assist the private sector in negotiating its reworked tax avoidance reforms, which are due to come into effect on 6 April 2020.

The rules echo changes HMRC has already rolled out in the public sector in that - from April 2020 – all medium-to-large private sector organisations will be responsible for determining how contractors they engage with should be taxed.

Previously it was down to contractors to self-declare whether or not the work they do for their clients meant they should be taxed in the same way as off-payroll workers (known as outside IR35) or as salaried employees (inside IR35).

Aside from stating how the IR35 rules are changing for private sector firms, the guidance also sets out how companies should pay their contractors from a National Insurance and tax perspective, if IR35 rules are found to apply to their engagement. The document also outlines what steps contractors can take should they disagree with the classification that the contracting firm has given them.

However, Andy Chamberlain, deputy director of policy at the Association of Independent Professionals and the Self-Employed (IPSE), says the HMRC advice does not go far enough.

For example, he says the guidance fails to acknowledge the difficulties organisations face when trying to determine how the contractors they engage with should be taxed, and also offers little in the way of advice on how firms should negotiate the complexities involved with working this out.

“Similarly, it states that clients must take ‘reasonable care’ [when determining the tax status of their contractors], but then offers no guidance at all on what ‘reasonable care’ actually means,” said Chamberlain.

“When the guidance declares that clients must decide the ‘employment status’ of workers, it also fails to mention whether that means they should consider employment rights such as holiday pay, sick pay and defence against unfair dismissal. That is no small omission when there is such confusion about employment status in this country."

The emergence of the guidance eight months before the roll-out of the private sector reforms is likely to be seized on by some contracting stakeholders as a positive move. A spokesperson for HMRC confirmed that it will be issuing more preparatory materials in the coming months.

“We are also conducting a series of webinars, workshops, and one-to-one teach-ins with businesses before the reform is introduced, to make it as easy as possible for them to make the correct determination,” the spokesperson said.

“These guides build on the list of actions organisations can take to get ready for the reform, which we published in April. Further guidance will be published as legislation on the off-payroll working rules progresses. We are working closely with organisations to support them in their preparations for the reforms.”

Despite these assurances, Chamberlain reiterated IPSE’s view that HMRC would be better off scrapping the reforms altogether than pressing ahead with the private sector roll-out.

“The changes to IR35 were a disaster in the public sector, and they will be even worse in the private sector. No amount of guidance can change that, and we urge the government to delay and rethink these reforms,” he added.

HMRC hopes the IR35 changes will crack down on people who avoid tax by declaring they are contractors - and thereby not part of PAYE taxation - but are effectively working for a single employer nonetheless.