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This Monday saw the release of the HMRC’s draft finance bill, detailing the reforms as to how the IR35 legislation must be operated in the public sector from April 2017.
There have been strong reactions from industry bodies to the Government’s new ‘Draft provisions for Finance Bill 2017’, nearly 400 pages of new tax legislation setting out the draft provisions for technical consultation, including changes to National Insurance contributions, clampdown on salary sacrifice contracts for new car schemes, and simplification of PAYE Settlement Agreements.
While the draft reveals that measures will be implemented to prevent the double-taxing contractors’ income from public sector assignments, more clarity has been urged from industry bodies and involved parties as to how this will work in reality. There is a concern that public sector hirers will manage their liability by not engaging freelance professionals, but rather turn to consultancy firms at a higher cost to taxpayers.
Responding to HMRC’s draft legislation on IR35 in the public sector, Julia Kermode, Chief Executive of The Freelancer & Contractor Services Association, said: “I suppose contractors should be pleased that the draft legislation apparently includes measures to prevent double taxation of their income from public sector assignments, which would otherwise arise from a directors fee and dividend payments. However there is insufficient detail on how this will work in practice – the directors fee attracts tax & NIC at source, dividends are subject to personal tax through an individual’s self-assessment tax return and until we have more clarity on the precise mechanism we do not know if double-taxation will actually be prevented.
“And that is not the only problem with the legislation. As widely predicted, we are starting to see public sector hirers managing their new liability through a wholesale ban on engaging freelance professionals through personal service companies, in at least one case I’ve heard of the hirer is instead turning to consultancy firms at significantly higher cost to taxpayers. Alternatively, we expect hirers to err on the side of caution to protect themselves, deem all contractors to be within IR35 and unfairly tax them as employees but without any of the statutory benefits that come with being an employee.”
She concluded: “Furthermore, the draft legislation does not mention how contractors can appeal a hirer’s decision regarding their IR35 status, so it seems that HMRC either doesn’t anticipate any disagreements, or assumes contractors will simply accept the hirer’s decision in order to undertake a particular assignment.”
The Association of Recruitment Consultancies (ARC) have also responded to the Government’s new IR35 proposals.
Ben Grover, External Policy Adviser at ARC, said: “We now want to study the draft law dealing with NICs as this is a first, where personal deductions must be made in respect of a payment which would otherwise be due to a company. There will inevitably be an adjustment to rates where IR35 applies and it remains to be seen as to how agencies address the employers’ NICs element. Fortunately the new rules will not apply until April 2017.”
Since the introduction of IR35 in 1999, Dave Chaplin of Contractor Calculator has developed a free online IR35 test which has been taken by over 100,000 users.
He commented: “Contractors and everyone else in the supply chain want reassurance that they are working within the rules. The whole sector is in for a painstaking year ahead as we have yet to see anything from HMRC that gives us confidence that its tool will provide ‘upfront certainty’ on IR35.
“Building a tool that provides a simple yes/no result cannot be done due to the inherent complexity of employment status, which lies on a spectrum. IR35 is based on complex employment status legislation and case law that dates back to the 1960s. Even experienced IR35 experts and HMRC inspectors can struggle with the law in this area.”
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