There are some scare stories circulating around the new Intermediary Reporting Rules from HMRC. Our view is that there is little to worry about for a typical Whitefield client.
The background to this is the so called “Agency Rules” which prevent, in most cases, Employment Businesses from paying anyone on a self employed basis. These have been on the statute book for decades, and are one reason why Personal Service Companies grew in popularity during the late 1980s/early 1990s, and in due course why IR35 came to arise in the late 1990s.
Tax is never static, and there have been pressures on these rules, testing their boundaries. Partly this has been from disaffected operators of Managed Service Company arrangements; partly from operators of schemes trying to offer a tax advantage over “normal” on shore tax rates – schemes that are normally closed down within a few years, or sooner, and often with a tail of litigation and back assessments on their users; partly from so called “IR35 proof” schemes.
Against this background of the Agency Rules being stressed by the tax industry, the Government has pushed back with new legislation (a) tightening the Agency Rules and requiring tax and NI deductions in some cases (not PSCs) and (b) introducing new reporting obligations for Employment Businesses.
HMRCs latest thinking is at:
Onshore_Intermediaries_False_Self_Employment_Summary_of_Responses.pdf
by way of consultation responses and next steps. Note Whitefield were a consultation responder (page 21). This was published March 2014, and legislation is in this years Finance Act.
Its clear in this document, page 24, that the rules are not intended to apply to PSCs:
“As is currently the case, the proposed Agency legislation will not generally apply where a worker is engaged via a PSC, as all the above criteria will not normally be met.”
What seems to have attracted concern recently from some commentators is that HMRCs views on the non applicability to PSCs is not embedded in the legislation. There is a speculation that there is some hidden agenda, and HMRC are being dishonest or have changed their stance.
This really comes down to conspiracy theories; whilst HMRC have their faults, often significant, embedded dishonesty isn’t one of them. Whilst situations of tax exemption by guidance rather than statute are not ideal, there is no indication from HMRC that their intentions around this legislation/PSC applicability has changed. Both in the document above, and other pronouncements since, there is no indication that HMRC wish to extend these rules to typical PSC users, or affect how PSCs operate. Equally there is no extension, or change, to IR35, implicit or explicit.
More recently HMRC have published guidance on how reporting aspects work:
https://www.gov.uk/government/publications/employment-intermediaries-reporting-requirements
In respect of PSCs this says:
“One-person limited companies, or personal service companies (PSCs), that only supply a client with 1 worker don’t have to send reports to HMRC.
“If the worker is supplied through an intermediary they will be included in the return of the intermediary that has the contract with the end client.
“If a PSC supplies more than 1 worker, including any subcontracted workers, it will be acting as an intermediary and will have to send reports for each reporting period.”
What this means is HMRC will have a periodic return of workers agencies have paid via PSCs. Whilst they don’t explicitly have this at present, it would have been easily available on request. This regime aligns PSCs with the regime that has applied in the Construction Industry for some time, where a different type of employment status/IR35 issue has existed for many years, and has carried on regardless of reporting.
There is nothing to suggest the reporting is sinister for a compliant PSC, nor some sort of background IR35 investigation impetus, however it would conceivably assist in identifying bogus companies and tax/benefit motivated identity fraud.
However in a time of increased fiscal tightness, closer scrutiny of IR35 compliance could always be on HMRCs radar, or that of a new government this May. This legislation could assist in this in terms of identifying perceived easy targets. Its therefore important that:
~ IR35 compliance is taken seriously by all PSC users
~ Working practices are IR35 compliment and evidenced as such, including recording and retaining the evidence. We cannot stress enough that working practices are far more important that the written contract.
~ Contract Confirmation letters or similar are used (Qdos have a useful one on their website under “confirmation of arrangements”)
~ Insurance is in place – eg our Professional Fee Protection Scheme, or similar from IPSE, Qdos, etc.
In summary, don’t panic, and don’t believe scare stories, but equally never be complacent around IR35 risks.