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IR35 extension legislation published, ARC fears negative fallout

Responding to the publication today of draft legislation extending the IR35 public sector rules to the private sector, Adrian Marlowe, chair of the Association of Recruitment Consultancies (ARC), commented

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The Association of Recruitment Consultancies - ARC

“Now that draft legislation has been published, HMRC’s position on extending the public sector rules to the private sector is clear. The application date of 6th April 2020 is no surprise despite the rumours that HMRC may delay the launch,  but nevertheless contractors, agencies supplying them and hirers alike will no doubt be disappointed that few adjustments have been made to the principles and that it is proceeding much as originally forecast.

“ARC will continue to review the draft legislation, against the background that we have long pressed for modernisation of certain key elements to IR35 principles. The assessment of hypothetical employment status and related definitions has caused much confusion over the years and there is a plethora of evidence that the assessment is problematic. After two years of use the CEST tool, which is intended by HMRC to make the assessment easier, is still flawed and misleading.

“We believe the government is missing a trick in not tidying up the entire IR35 legislation at this stage. Instead, with the inclusion of an obligation upon a hirer to give reasons for the outcome of its IR35 assessment, and liability for the tax and NICs if reasons are not given, the rules are now more complicated than ever. We fear the resulting administrative burden and associated risk will inevitably induce blanket decisions. HMRC argues that it seeks to avoid blanket IR35 decisions, be that as it may. The decisions that are most likely to be made are not IR35 decisions, they are the decisions not to use any affected company contractor, perhaps save in very obvious ‘outside’ circumstances, so avoiding application of the rules in the first place. This of course could be HMRC’s intention and, if so, it will probably achieve the objective of addressing tax avoidance on a grand scale, but at what cost?

“At the same time the likely fallout may well offer a golden egg to the alternative model, the umbrella sector not affected by this legislation. Accordingly employment businesses currently supplying contractors may want to consider their position and policies. What services can umbrellas offer that agencies cannot, given that unlike employment businesses that provide work finding services which are regulated and may not charge their agency workers, umbrella businesses do not provide work finding services and do charge their employed contractors?

“If independent company contracting is to be protected, with those willing to take the risks associated with running a business being recognised as deserving better tax breaks, it is imperative that there is an independent review of this legislation before it is implemented. There has not yet been any review by the Treasury Select Committee despite one having been planned based on evidence from ARC when the public sector rules were imposed. Perhaps now is the time for such a  review to take place?

Adrian Marlowe, Chair, the Association of Recruitment Consultancies