The complexities of extending the IR35 rules to the private sector become palpable as the size of businesses becomes a crucial factor for the application of such regulation. In the public sector, where the rules already apply and affect all organisations, company’s size is irrelevant. In the private sector, however, the size of the business is a crucial factor. The aim has always been to exclude small businesses from the rules, but this becomes increasingly challenging as a perfectly bounded definition of what constitutes a small business does not exist.
As a result, uncertainty is brought upon private companies on whether they need to implement IR35 rules or not. Currently, the consultation suggests using the definition of small company from the Companies Act 2006, which only applies to limited companies. Small unincorporated business, such as sole-traders or partnerships, must tread carefully and take appropriate advice before concluding whether IR35 rules will apply to them. According to the consultation, the size of unincorporated businesses can be determined by their number of employees, which can be ambiguous as companies might qualify as small only if they define members of its workforce as off-payroll, which is the main issue IR35 tries to address.
n order to ensure that all parties in the labour supply chain comply with their obligations, provided they have sufficient information to do so, the government’s proposal is that both the determination of status and the reason for that determination should be cascaded to all parties in the supply chain. Therefore, legislation must ensure this happens while at the same time suggesting that a client-led process is used to deal with any challenges to the determination. As a result of the individual being able to raise concerns with the issuing client, the client will take reasonable care when reaching its final view on the status determination. This assumption still remains to be seen.
The use of the Check Employment Status for Tax (CEST) tool, introduced in 2017 to help with the public sector roll out, is HMRC’s bet to support clients and workers. HMRC still considers the tool capable of making a determination in 85% of cases. However, the institution is reviewing the tool, and identifying improvements and test enhancements with stakeholders before the latest reform is implemented. Several million decisions are likely to be required when the tool is rolled out to the private sector following the claim that the tool has been used more than 750,000 times in relation to the public sector, as the risk of a potential IT melt down and a large number of unanswered questions is quite realistic.
The other complexity raised by the consultation is timing. The legislation to introduce IR35 changes will be in a draft Summer Finance Bill, according to the consultation, despite running to 28 May 2019. The window left for incorporation into any draft Summer Finance Bill is alarmingly short, as it would need to be published soon after the deadline to allow time to pass through parliament.
Additionally, introducing the relevant IR35 legislation after the Autumn Budget would come dangerously close to the target implementation date of April 2020. We may witness a déjà vu of the introduction of IR35 in the Public Sector, when the government ran up against its own self-imposed deadline following the introduction of complicated legal changes in a relatively short space of time.