A lack of clarity from HMRC and rumours of forthcoming changes to just-reformed IR35 legislation are combining to raise anxieties among contracting professionals working in the public sector as they prepare to adapt to new tax rules.
From April, public sector hirers will be responsible for determining whether or not IR35 rules apply to personal service company contractors. However, should HMRC subsequently decide that a hirer was mistaken, the recruitment agency or third party responsible for paying the contractor’s fees will have no defence against the public sector body’s (PSB’s) error.
If the PSB decides that IR35 does not apply to a certain contractor, leading the contractor’s agency to pay his or her fees on a gross basis, then the agency could become liable to pay retrospective PAYE and NICs on that income should the Revenue determine that IR35 does indeed apply.
Legal expert Theresa Mimnagh of specialist recruitment law company Lawspeed confirmed that the rules published by HMRC on 5th December last year mean that no defence currently exists for an agency in these circumstances, giving it little option but to pay the NICs and income tax that HMRC believes to be owed. The only possibility for the agency to avoid this is for it to prove with evidence over and above the hirer’s conclusion that IR35 does not apply.
She added: “The rule here, therefore, is that the agency cannot rely on the hirer’s determination in itself, which seems very unfair given that HMRC has consistently said that it is the public sector hirer who should determine the IR35 status.”
This issue has now been raised with HMRC by several industry bodies, including the Association of Recruitment Consultancies (ARC), but Ms Mimnagh stated that there is as yet no indication that the Revenue has taken the concerns on board.
The ARC has received information from a variety of sources that new legislation is in the offing that will formally make PSBs the sole arbiter of a contractor’s IR35 status, forcing agencies to follow whatever decision that hirers make about this on any contractor supplied to them.
Ms Mimnagh dismissed this as pure speculation, explaining that HMRC had confirmed when asked about this that there will be “no change at all” to the new IR35 legislation.
Dave Chaplin, CEO of Contractor Calculator, has recently advised PSBs to transfer all PSC contractors temporarily to PAYE Umbrella Companies to allow sufficient time to make an informed IR35 evaluation.
Contractors worrying about whether their contracts fall inside or outside IR35 can use a free online questionnaire devised for Umbrella Company group Unitum by tax specialists and approved by a barrister. Unitum’s IR35 advice is available here, while the questionnaire can be accessed here.