HMRC recently published a consultation paper called ‘off payroll working in the private sector”. You can read it here…
It makes three suggestions for how independents and their clients successfully operate in the IR35 environment.
1. Extend the public sector rules to the private sector
2. Change the record keeping requirements
3. Requiring businesses to ‘secure’ their supply chains.
These seek in one way or another, as I read it, to shift the onus of proof that someone that is hired to perform a role is not an employee from the supplier to the client, and make it harder for small businesses to prosper. The proposed penalties mean, again as I read it, that most hiring organisations will have to assume, unless positive proof is provided, that a supplier is subject to IR35.
That means our invoices will be treated, to all intents and purposes, as salary and tax and national insurance (and employers NI) will be deducted before they are paid. That’s going to be a shock to many of the million or so people who run limited companies with only one or two directors. Myself included.
Perhaps what’s more worrying is the language of the consultation document. The title itself implies that ‘payroll working’ is the norm that the HMRC seeks. Yet the trend to self employment and independent portfolio careers is clear. Many people are, or will be, at various points in their careers, be working on a model that HMRC seems unconsciously biased against. That’s quite alarming. The consultation also talks regularly of ‘non-compliance’ when a director pays a tax and NI minimising salary and pays corporation tax on profits before distributing that income as dividend, yet this is a fair and legal application of other HMRC rules.
There’s a real danger, in my opinion, in these proposals, of stifling innovation, rewarding compliance, and not entrepreneurship, of locking people into unsuitable employment, and shifting the balance of control.
We’ll keep an eye on these consultations and let you know in the comments here how things develop, I will be making a representation as part of the consultation and will take account of comments here should you wish to make any.
You might have gathered that I’m currently not a fan, but what are your views?
An interesting observation but not much is actually going to change as the hirer has always been the target if HMRC goes after what they believe is what should be a P.A.Y.E. arrangement.
As long as the contract is correctly worded and has the substitute clause in it and it can be shown that there is other business going on with other organisations there shouldn’t be a problem.
Umbrella company’s aren’t the answer.
Thank you for the comment Roger and I agree, at least insofar as it goes with IR35 having (mostly) been constrained within the public sector as hirer.
As the remit widens to private firms who may never have needed to know about the IR35 rules, far less assess them, that may change. Especially as penalties (and assumptions about the likelihood of them being levied) change. I think the onus will shift from one of assumption and trust to one of proof (at the time of making the contract) that the contract is outside the scope. Substitution is important, but may not always be possible (for example in one person businesses, or when hiring a specific skill held by only one member of staff, such as a professional speaker). I think IR35 certification may become far more common, and that just adds cost to doing business.
There’s another aspect to this too, which is the change in the attitude of HMRC which I think comes from a time when the Revenue and Customs merged. Customs ensured that the right duty was paid, the revenue managed the payment of (internal) taxation. The Budget was the means by which the Government cut their cloth to the revenue that was available, and borrowed the rest. (Remember “PSBR” anyone?)
There’s a mindset shift that is even expressed in the language the bodies used. “Duty” was collected to protect industry and investment in the UK, to level a playing field. They had strong enforcement powers, and there was a mindset that duty should be maximised within the rules. There was a social contract that meant we paid not a penny more tax than was due. The Revenue had limited powers and they were used sparingly.
Since the merger, my sense is the mindset has become more that of customs, the line has moved. Perfectly legal tax reduction approaches are now treated with opprobrium, whilst HMRC and the Govt, continue to write tax law that enables, even facilitates, some to minimise tax whilst other, softer, targets are caught in vindictive regimes.
IR35 seems to me to be one of those cases, again, as I’ve mentioned in the article, the language gives us some clues as to thinking. Pressurising the many small businesses by threatening their contracting principle with fines if they don’t collect tax from them, seems an overreach.