As expected the chancellor announced the extension of IR35 to the private sector.
As expected, the chancellor has gone forward with the extension of the off-payroll working rules (IR35) to the private sector. But after some recent legal cases and issues with checking employment status for tax, made it clear that there was a need to proceed with care, the implementation date has been put back to April 2020 and the change affects large and medium-sized businesses only.
The IR35 rules are as follows:
Businesses will be responsible for assessing an individual’s employment status.
The reform will not apply to the smallest 1.5 million businesses, and the large and medium businesses to which it will apply will be given longer to adjust, with the changes being introduced in April 2020.
From 6 April 2020, medium and large businesses will need to decide whether the IR35 rules apply to an engagement with individuals who work through their own company.
Where it is determined that the rules do apply, the business, agency or third party that pays the individual’s company will need to deduct income tax and employee NICs and pay employer NICs.
HMRC will not carry out targeted campaigns into previous years when individuals start paying employment taxes under IR35 for the first time following the reform, and businesses’ decisions about whether their workers fall within the IR35 rules will not automatically trigger an enquiry into earlier years.
HMRC continues to work with stakeholders to identify improvements to checking employment status for tax and issuing wider guidance to ensure the reform meets the needs of the private sector. Enhancements will be tested with stakeholders, operational and legal experts before implementation.
A further consultation on the detailed operation of the reform will be published in the coming months, and will inform the draft Finance Bill legislation that is expected to be published in summer 2019.
Some of the recent legal cases that gave the government pause on its originally proposed extension of IR35 to the entire private sector include the following.
MDCM Ltd v HMRC, 19 March 2018
Construction contractor Mark Daniels won his appeal over a contract covering the 2012/13 and 2013/14 tax years. During this time, his services were engaged by Structure Tone Limited (STL) via Solutions Recruitment Limited. HMRC argued that the engagement amounted to a contract of employment between Daniels and STL.
The judgment suggests that a contractor who is not controlled, is paid a daily rate, has no notice period or benefits, and is not part and parcel, should not be caught by the IR35 rules.
Although good news for the contractor, an examination of the judgment suggests that some case law was given limited consideration, which could leave the door open for an appeal to the upper tribunal by HMRC.
MDCM Ltd v HMRC: key factors
As with many recent IR35 cases, control was the key factor, with the tribunal ruling there was insufficient evidence to support HMRC’s claim that Daniels was controlled by STL.
Other key factors impacting Daniels’ IR35 status, according to the tribunal, included the following:
There was no requirement for either party to give notice to terminate the contract.
Daniels wasn’t considered to be integrated into the STL business.
Daniels was required to pay his own expenses.
MDCM Ltd v HMRC: substitution
Although Daniels won his case, the tribunal deemed there to be a mutuality of obligation (MOO) between himself and STL. It also found he was required to provide personal services to STL, as he wasn’t permitted to provide a substitute for his services.
While Daniels’ contract with Solutions Recruitment supposed a valid substitution clause, the tribunal found that this was unenforceable in practice. Furthermore, when Daniels gave notice that he wouldn’t be on site, STL would call Solutions Recruitment and request a substitute. The tribunal accepted the evidence that Daniels was never asked to provide a substitute, nor entitled to do so.
Jensal Software Ltd v HMRC, 16 May 2018
The tribunal verdict for Jensal Software Limited v HMRC was another IR35 tribunal victory for a contractor that has resulted in considerable embarrassment for HMRC. Throughout the case, HMRC demonstrated a loose grasp of the legislation it is supposed to police.
IT contractor Ian Wells successfully appealed a tax bill exceeding £26,000 relating to a succession of contracts during the 2012/13 tax year. Wells provided his services through his company, Jensal Software Ltd, to the Department of Work and Pensions (DWP) via recruitment agency Capita.
All employment status indicators pointed away from a contract of employment.
The taxman’s flawed interpretation of mutuality of obligation was disregarded by the judge.
Experts called HMRC’s decision-making and integrity into question.
HMRC’s poor defence demonstrated that the taxman does not understand IR35.
Jensal Software Ltd v HMRC: control
HMRC relied heavily on evidence provided by DWP officials, who noted that Wells was required to give feedback on the progress being made throughout the project. It also argued that Wells was expected to come to work each day.
However, Wells demonstrated that he had full autonomy over the work completed and noted that he regularly worked offsite under his own volition. This was confirmed by project colleague Andrew Lemon, who noted that Wells managed his own time and location around the demands of the role.
The judge made a clear distinction between the progress updates that Wells was required to deliver and the degree of control that employees are subject to, and concluded that the degree of control exercised didn’t constitute a contract of employment.
Jensal Software Ltd v HMRC: substitution
Much debate centred around the substitution clause in the contract between Jensal and Capita. HMRC argued that the clause wasn’t exercised and that the DWP would need to check the credentials of any substitute.
The judge acknowledged there was some restriction on the right of substitution but was satisfied the clause pointed away from an employment contract. She gave no weight to the fact that the clause wasn’t exercised, which could set a precedent for future cases.
Wells acknowledged that he had sought a substitution clause to comply with the legislation – an admission that might have indicated the clause was a sham, and duly flagged up by HMRC. However, the judge stated that Wells’ reasoning for inserting a substitution clause didn’t negate the existence of the right.
Jensal Software Ltd v HMRC: mutuality of obligation
The taxman argued that a hypothetical contract of employment existed between Wells and the DWP, based on the ‘obligation on the DWP to provide work and for Mr Wells to perform that work in return for a consideration’.
Critically, the judge rejected this interpretation, concluding: 'Although there is MOO [mutuality of obligation], it does not, in my view, extend beyond the irreducible minimum, nor does it demonstrate that the relationship was one of a contract of employment.'