HM Revenue and Customs yesterday published draft legislation extending IR35 off-payroll working rules to the private sector from 6 April 2020. The legislation was published as part of the government’s Finance Bill.

IR35 tax reforms in the private sector had previously been delayed as the government undertook a consultation on the details of the reform prior to its draft legislation.

The measure will only apply to engagements with medium or large-sized organisations in the private and third sectors (voluntary or non-profit) with small companies exempted. According to the UK's Companies Act 2006, a small company is defined as one that does not have a turnover of more than £10.2 million, a balance sheet total no more than £5.1 million and does not have more than 50 employees.

Among the key points of the draft legislation includes the shift in responsibility for operating the off-payroll working rules from the individual’s personal service company (PSC), to the organisation or business that the individual is supplying their services to. This shift in liability was also the case when IR35 off-payroll tax reforms hit the public sector. This includes responsibility for deciding whether the rules should apply and deducting the associated employment taxes and National Insurance contributions.

According to HMRC, the new measure is expected to impact 170,000 individuals working through their own company, who would be employed if engaged directly. The measures are likely to impact medium and large-sized organisations outside the public sector that engage with individuals through PSCs. Public sector organisations will also be affected by changes to improve the operation of the reform. Furthermore, it is likely that the measure will impact recruitment agencies and other intermediaries supplying staff through PSCs.

“This measure affects approximately 20,000 (recruitment) agencies who provide workers to medium and large-sized organisations,” the draft legislation stated. “They will need to operate payroll for any workers they supply who work through their own company and fall within the scope of the rules.”

HMRC added that up to 60,000 “engager organisations” outside the public sector are in scope of the reformed off-payroll working rules. It also added that there will be on-going savings for around 230,000 PSCs who will no longer have the requirement for determining status or associated accounting burdens.

HMRC will also introduce a client-led status disagreement process to allow individuals and fee-payers to challenge the organisation’s determinations.

The draft legislation adds that engagements with small organisations outside the public sector are exempt, minimising administrative burdens for the vast majority of businesses. However, the new rules were met with criticism from many quarters.

Fiona Coombe Director of Legal and Regulatory Research, commented, “The inclusion of an exemption for “small” clients makes rules that are already complex for many hiring organisations, even more complex. In addition, this creates an administrative burden for those organisations that sit on the threshold of the Companies Act definition of a small company and who may have either a successful or difficult trading year."

Tom Hadley, director of policy and campaigns at the REC, said, “We know from experience that the IR35 rules are a huge problem for employers and contractors alike. Making sure everyone pays the right tax is essential, but the rules need to be clear to be effective. The last thing private sector businesses need at this time of Brexit uncertainty is rushed or poorly-designed tax rules that add further uncertainty to an already fragile business landscape.”.

Samantha Hurley, Operations Director at (APSCo) and Co-Chair of HMRC’s IR35 Forum, also commented on the draft legislation, “While the draft legislation is largely in line with our expectations, we at APSCo are extremely disappointed that fee-payers will shoulder the liability of incorrect status determinations – particularly as this is at odds with what was anticipated. It is frustrating that recruiters will, in most cases, continue to bear the brunt of liability in the supply chain whether as the fee payer or the first-tier supplier.”

“We welcome the fact that the criteria which defines entities which are ‘small’ – and so exempt from the changes – has now been more clearly defined,” Hurley said. “However, there is no statutory obligation on the client to notify the parties in the chain that they are small and commercially this will be problematic.”

Mike Butchart, CEO of QAccounting, a contractor accounting service, commented, “First and foremost, IR35 reform is not the right course of action. However, with the release of the draft legislation, recruitment agencies and medium and large engagers can start putting processes in place to manage reform next year with a degree of certainty.

Dave Chaplin, CEO of guidance resource ContractorCalculator, said HMRC was essentially asking organisations to “judge tax crimes before they have been committed” with no way to appeal to a court.

International legal firm, Osborne Clarke, has published a detailed briefing on the impact of the proposals.