IR35 could become largely irrelevant within a few months of the Employment Intermediaries legislation reporting requirements coming into force from April 2015.
The hugely burdensome reporting rules could include limited company contractors using personal service companies (PSCs), but only if supervision, direction and control (SDC) apply.
Suddenly, it will become in everyone’s interests – clients and agencies – for SDC not to apply. The absence of control means IR35 cannot apply.
The idea of the Employment Intermediaries rules is to prevent large numbers of workers being forced to become self-employed sole traders and hired by recruitment agencies to work on a client’s project when really they should be employed the by end user client.
This model is commonplace in construction, and abuses are equally commonplace, so HMRC is quite right to address the issue.
But the taxman has been true to form and has unfortunately used a whopping great sledgehammer to crack a relatively modest nut. The legislation requires ‘employment intermediaries’, which can be recruiters, client organisations and even other contractors, to report to HMRC any payments made to workers that are outside of Pay As You Earn (PAYE).
If that in itself was not onerous enough, particularly for agencies that are already bowed by cripplingly burdensome regulation, the data that HMRC asks intermediaries to report is little short of invasive. Plus the limited company contractors affected are suddenly on HMRC’s radar as delivering personal service, which is not good from an IR35 perspective.
But there may be a silver lining. Workers, including limited company contractors, are considered caught by the legislation only where it cannot be proved that there is no supervision, direction and control, or any right of supervision, direction and control. There is now an incentive for agencies and clients to be bothered about a contractor’s IR35 status, where previously there was none.
If the agency/client does not want to report quarterly to HMRC about potentially thousands of limited company contractors on their books, then all they have to do is make sure they confirm that there is no supervision, direction and control of their contractors by the client.
When an inspector comes along and attempts to entrap the agency, client and contractor into giving evidence that implies there is SDC, the taxman will be totally scuppered. The contractor’s IR35 defence becomes much stronger.
IR35 service providers tell us that a great many IR35 cases are founded on evidence given by clients, either inadvertently or deliberately, that implies they control the contractor. Now if the client or agency does that and the contractor is caught by IR35 and SDC applies, then the intermediary – the agency or client - face pretty stiff penalties for failing to report on their non-PAYE workers.
In fact, what we could witness is agencies educating their clients to be proactive and to ask the contractors if they minded signing a confirmation of arrangements that clearly shows that no SDC is present from the outset.
Once the word spreads following the imposition of the new reporting rules from April 2015, IR35 could well be dead within months.