HMRC published an IR35 consultation covering off-payroll working in the private sector on Friday which aims to address compliance with off-payroll working rules in the private sector. The consultation will close on 10 August 2018.

Last April, HMRC implemented reforms of off-payroll working rules for the public sector. HMRC added that “evidence suggests that the public sector reform has been effective in increasing compliance.” HMRC has provided research on the impact of ‘Off-Payroll Reform in the Public Sector’ which might indicate how such rules could impact the private sector. Legal firm, Osborne Clarke have also published a useful insight detailing their predictions on the likely impact.

Kevin Barrow, Partner at Osborne Clarke, commented on the publication of the consultation. Barrow addressed status assessments, stating, "The government is aware that some suppliers to the public sector have decided to ignore the end user assessment/HMRC tool and instead carry out their own assessments. In some instances these suppliers sit below the staffing company in the public sector supply chain and as such may be deemed, under the 2017 public sector IR35 arrangements, to be the "Fee Payer" with liability for IR35 (thus, they claim, exonerating staffing companies and end users). Whether this is currently effective will depend on exactly how the arrangements have been set up – there are many who consider some versions of this arrangement NOT to be effective. And some public sector end users have prohibited use of an extended supply chain such that someone other than the staffing company is the liable Fee Payer."

"In any event the government seems to be considering taking action to prevent, or very significantly reduce, the use of this sort of approach in the new consultation but we predict there will be a battle over that with the probability that proper assessments by persons other than the end user and other than using the HMRC tool will still be permissible under any new legislation," Barrow said. "However people using that approach may find themselves constantly challenged by HMRC so care will need to be taken."

The most significant outcome of the consultation is the likelihood that, just like the public sector rules, end-users and staffing companies will be held liable for tax and social charges in respect of Personal Service Company contractors who “fail” IR35 various penalties. Companies found to have unlawful tax schemes in their supply chains, could face civil and criminal liability under various new legislation such as the Criminal Finance Act 2017 and other new measures suggested.

Then in last year’s Autumn Budget, the government announced that it would consult on how to tackle non-compliance with the off-payroll working rules in the private sector.

HMRC’s IR35 consultation for 'off-payroll' working in the private sector states that it is looking at “improving the rules around 'off-payroll' working so contractors who work through their own company pay the right tax."

It also states, "the consultation will specifically look at how to increase compliance with the existing 'off-payroll' working rules. These rules mean that contractors such as IT and management consultants who work through their own company but are in practice employed by a third party, pay the right tax as employees."

In the consultation document, it is stated that current legislation is not working effectively and the cost of non-compliance in the private sector is high and growing and projected to increase from £700 million in 2017/18 to £1.2 billion in 2022/23. The consultation document also claimed that the genuinely self-employed will not be affected.

Financial Secretary to the Treasury, Mel Stride, commented, "It's very important that we recognise the hard work of contractors across all sectors, who contribute to our growing economy. But it's also right that we have a fair tax system that balances efficiency and simplicity for taxpayers, while also supporting our vital public services. That's why we're consulting carefully and welcome a wide range of opinions and evidence on how to tackle non-compliance."

Whatever reforms are eventually put in place, there remain concerns that HMRC does not have the right resources to enforce IR35 rules. Last week, an IT contractor working through an agency on a government contract won an IR35 case against the HMRC.

Barrow commented, "There will be a lot of discussion about this in the next few months and it will be interesting to see the government's response, and whether the final legislation can stem this rising tide of independent assessments."

Dave Chaplin, CEO of ContractorCalculator, commented on the consultation, "The audacity of HMRC to release this consultation within days of being heavily defeated on IR35 by a contractor in court is incredulous. How can HMRC be expected or trusted to educate the private sector to assess the employment status of workers when they cannot even get it right themselves. If this goes ahead it will be a complete car crash.

Seb Maley, Qdos Contractor CEO, commented, “This consultation is an opportunity for the Government to thoroughly and honestly review the impact private sector reform could have on contractors, engagers and the many other parties in the supply chain.

The Recruitment and Employment Confederation also commented on the consultation with REC Director of Policy Tom Hadley stating, “We support the government’s efforts to improve compliance and ensure everyone pays the right amount of tax but are concerned that the government wants to proceed with reforms which would cause significant upheaval to private sector employers and recruiters. This consultation is a good opportunity to rectify issues such as those with the CEST (check employment status for tax) tool which have been flagged by recruiters.”

“We are pleased to see the government acknowledge that the public sector needed more time to prepare and adapt to the public sector changes,” Hadley said. “The government needs to learn from this and ensure that there is sufficient time for the implementation of any reforms, introducing changes in April 2019 would be premature. We do not want to see a repeat of the public sector chaos. We look forward to gathering members views and representing our industry on this issue over the coming months.”

Barrow added, "We believe that, on balance, it is more likely than not that the new regime will come into force in April 2019, and that it will be modelled in large part on the existing public sector regime. Yes there are defects in the current public sector regime but we think it more likely than not that  the government will press on, and hope to iron out the problems by slightly amending relevant provisions of the existing regime and adding some extra powers for HMRC (and perhaps extra penalties for end users)."