TaxFeb 27 2020

Treasury pledges 'light touch' as IR35 reforms confirmed

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Treasury pledges 'light touch' as IR35 reforms confirmed

In its promised review of the IR35 rules published today (February 27) the government admitted the incoming changes were a "major change" for the industry. 

But it argued the reforms were necessary to address the "fundamental unfairness" surrounding non-compliance with the current rules, which it warned would soon deprive the taxpayer's pot of billions. 

Introduced in 2000 IR35 is an anti tax avoidance rule which applies to all contractors and freelancers who do not fall under HMRC’s definition of being self-employed.

As of April 2020 every medium and large private sector business in the UK will become responsible for setting the tax status – or IR35 – of any contract worker they use, as has been the case in the public sector since 2017.

In today's review the Treasury doubled down on its promise not to penalise inaccuracies relating to the off-payroll working rules in the first 12 months of the changes, other than in cases of deliberate no-compliance. 

HM Revenue and Customs also pledged information resulting from changes to the rules would not be used to open new compliance investigations into personal service companies, used by contractors, for tax years prior to April 2020. 

The government said it hoped this move would provide reassurance to individuals that any change in status as a result of the reform would not lead to HMRC opening a historic enquiry.

In response to concerns raised over the status of a client company based overseas, the government agreed legislation would be amended to exclude wholly overseas organisations with no UK presence from having to consider the off-payroll working rules. 

As expected the Treasury denied calls to halt its reforms and confirmed the changes would proceed as planned on April 6, which it insisted was necessary to address the "fundamental unfairness" of the current system. 

In today's review the Treasury predicted continued non-compliance with the IR35 rules in the UK would cost the Exchequer more than £1.3bn a year by 2023-24. 

It warned this approach was "unsustainable" and would deny the taxpayer "significant revenue for essential public services".  

The controversy surrounding the incoming IR35 changes first prompted the former chancellor, Sajid Javid, to pledge this review of the rules as part of the Conservative party’s manifesto in the lead up to last year's general election.

At the time Mr Javid said he wanted to make sure the proposed changes were “right to take forward” but when the Treasury announced the review last month, the industry branded the set up “hasty” and “meaningless”.

When current chancellor Rishi Sunak made reassurances earlier this week that the taxman would not be "heavy handed" during the first year of changes to off-payroll rules it sparked a fresh wave of fury from campaigners. 

Some claimed these comments showed the Treasury had no intention of making significant changes to the IR35 shake-up despite the ongoing backlash from the business and contractor community - and their concerns appear to have been warranted. 

The government values the significant contribution of flexible workers to the UK economy, but it is fair that individuals who work in a similar way should pay broadly the same amount of tax...HM Treasury

Seb Maley, chief executive at tax consultants Qdos, warned whilst applying a "light touch" to reform for the first year was welcomed, this could be a "red herring". 

He said: "It only applies to ‘penalties’, not necessarily tax liability owed as a result of inaccurate IR35 determinations. Therefore, private sector companies should not pay too much attention to this.

"The government has clearly ignored calls for a genuine review into IR35 reform, with the findings suggesting they were simply paying lip service to appease critics.

"Issues around the CEST tool, HMRC’s level of support and ways contractors can contest unfair IR35 decisions still stand.

"With IR35 reform only a month away, the response from government is very disappointing, albeit unsurprising."

Julia Kermode, chief executive of the Freelancer & Contractor Services Association, said the body welcomed confirmation of the chancellor's promise of a "soft-landing" surrounding the reforms. 

Ms Kermode said: "Particularly as there is mounting evidence that clients have been unable to fully prepare in advance of the April 2020 changes.

"We have confirmed with HMRC that the soft landing is genuine and that penalties won’t ordinarily be applied for the first 12-months of implementing the reforms.

"This is good news because HMRC’s education programme was delayed due to the general election, so a number of businesses are only finding out about the reforms and their new liabilities now, just weeks before the legislation comes into effect. 

"However, the soft landing does not mean that businesses and individuals can plan to ignore the changes because HMRC has also confirmed that penalties will be applied where there is deliberate non-compliance."

rachel.mortimer@ft.com

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