IR35 update – abolition of Business Entity Tests from April 2015

Posted by David on November 24, 2014
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Many readers will be aware of the ‘IR35’ legislation which was enacted some 14 years ago. It provides that if a worker supplied by a Personal Service Company (PSC) contractor would be an employee of the ‘end user’ of the service, but for the use of the PSC, then virtually all the income from the contract must be subjected to PAYE and NIC by that PSC. However employment status remains a matter for case law and the courts (or tribunals), rather than statute, to decide upon, thus a considerable degree of uncertainty remains.

In 2012 HMRC therefore announced a series of ‘Business Entity Tests’ (BETs) which would enable PSCs to self-assess whether they are at high, medium, or low risk of an ‘IR35 review’ by HMRC. However the ‘IR35 forum’ (a joint working initiative between HMRC and various other private sector bodies having an interest) has now confirmed the recent rumours, that the BETs will no longer be used from April 2015.

This has led to some speculation that the whole IR35 process may now be ‘withering on the vine’; however this is not quite how ET4B sees it.

In background, a House of Lords Select Committee was appointed in November 2013 to consider the consequences for tax revenues arising from the increasing use of personal service companies. After considering verbal and written evidence from various interested parties the Committee provided a report and the Government’s response to this report was published in June this year. In summary, and whilst the Government acknowledged that abiding by IR35 creates a significant cost to contractors, the simple abolition of the IR35 rules (as proposed by some, including the Office of Tax Simplification) was felt to be ‘unwise’ given the ‘Exchequer protection’ that the legislation is considered to generate.

On an even more cautious note, the Government also commented that it was unconvinced that the resources currently allocated by HMRC ‘were sufficient to ensure compliance with the IR35 legislation’. In addition (and on a separate point), the Government further committed to challenge in particular (non-PSC) ‘umbrella’ payroll companies who incorrectly apply for or misuse HMRC dispensations.

In a slightly more positive tone, some noises were made in the June response to suggest that HMRC guidance and requirements would be updated to ensure these become more relevant and pertinent. It is perhaps with this in mind that the abolition of the BETs has been announced. Rather than slowing down HMRC’s impetus on IR35, we think it is simply a question of HMRC belatedly accepting that the BETs do not fit the purpose for which they were originally intended.

Within the Public Sector there has been a tendency incorrectly to treat the BETs as if they are the only valid accurate barometer of IR35 compliance, thus ruling out many legitimate independent service providers and making the process less competitive.

Within the private sector there has always been a reluctance to accept the BETs as a valid guide to IR35 and in practice these have been ignored. We suspect that most PSCs who take the tests would at face value be deemed by HMRC to be at ‘high risk’ of review, but this strongly contrasts with the fact that very few of these contractors actually see themselves as within IR35. One of these assumptions must be wrong, and (as we always suspected) HMRC has in effect accepted that it is the BETs that are fatally flawed. The previously published HMRC Employment Status Indicator (ESI) tool (whilst not focussed directly on IR35, and despite having its own limitations) in truth provides a more accurate assessment of employment status.

Therefore whilst we cannot expect the HMRC IR35 review teams to simply ‘go away’, we can assume that in future HMRC will not rely simply on the (erroneously slanted) Business Entity Tests as justification for either commencing, or continuing with, a review.

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HMRC Know Your Customer (KYC) Reviews – an update

Posted by David on November 17, 2014
Expenses and benefits, Flexible Benefits, HMRC, News articles, Status, Termination Payments / Comments Off on HMRC Know Your Customer (KYC) Reviews – an update

After going rather quiet on the ‘PAYE Audit’ front for a few years, HMRC has now introduced a new round of employer reviews, under the title of ‘Know Your Customer’ (KYC). Whilst these sound like a bit of a cosy chat, we should not overlook the reality – that for all intents and purposes these are simply PAYE Audits aka Employer Compliance Reviews, in another guise.

The ‘KYC’ programme is initially being rolled out by HMRC’s Large Business Service (LBS) teams i.e. those offices who deal with the largest employers in the country. However this is no surprise: HMRC invariably follows the ‘law of diminishing returns’ when undertaking Employer Compliance work, i.e. the larger employers will always be first in line, and things then gradually work their way down to medium and smaller-sized structures.

KYC reviews initially involve a high level review of the employer’s policies. This may happen before or after an initial KYC meeting with HMRC. From there we can expect HMRC to focus in on what it perceives to be the main areas of risk. Whilst those areas will vary depending on the worker profile, experience suggests that HMRC will always wish to consider the following common risk areas:

  • Employment status: recent changes to the employment agency or ’employment intermediary’ rules seem to have re-focussed HMRC’s minds on the risks associated with temporary workers, self-employed, and limited company engagements.
  • Termination payments: businesses that have seen substantial staffing changes can expect HMRC to take a particular interest in severance packages paid, with the usual focus on Pay in Lieu of Notice and any other payments on termination potentially arising from the contract (rather than simply from the severance).
  • Company expenses policies: relevant policies include those applying to company vans, company cars and private fuel (the last one is a particular HMRC favourite as this represents an all or nothing benefit when linked to company vehicle use).
  • Flexible benefits and salary sacrifice: HMRC will be especially interested in any aspect of the scheme which has not already been cleared fully by HMRC on a ‘cards face up on the table’ basis (or where the ‘goalposts have moved’ so that the scheme does not operate precisely in the way HMRC was told originally).

For those employers who also have ‘Senior Accounting Officer’ (SAO) reporting responsibilities, this provides HMRC with an additional angle of approach, i.e. within a KYC review HMRC may at the same time seek assurances on the validity of previous SAO reporting and the extent of internal checking undertaken to verify this. Indeed we are now seeing HMRC ask for copies of relevant internal audit reports – an approach not previously followed.

On the plus side, our own recent experience has indicated that, with a little advance planning it is usually possible for an employer to take and retain control of much of the process. If so the employer should be able to approach any KYC review with a fair amount of calmness, rather than simply hoping for the best, and then having to ‘fire-fight’ when issues later arise.

If you require assistance in dealing with a forthcoming KYC review or in relation to any other Employer Compliance matter, please contact the ET4B team.

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OTS recommendations – a whole new ball game, or tinkering with the rules?

Posted by David on February 19, 2014
Expenses and benefits, Flexible Benefits, HMRC, National Insurance, News articles, Payroll / Comments Off on OTS recommendations – a whole new ball game, or tinkering with the rules?

At the end of last month the Office of Tax Simplification (OTS) published its eagerly anticipated Second Report into the tax treatment of Employee Benefits and Expenses.

Not everyone will wish to read all 86 pages of the Report, therefore we have produced a summarised version, together with some of ET4B’s own observations, in this attached document. However the fundamental questions addressed boil down to two things; can interpretation and administration of the rules be made any simpler, and can HMRC do more to help employers in their (sometimes reluctant) role as informal ‘tax assessor and collector’.

Amongst some fairly significant changes proposed by the OTS, the main ones are as follows:

– HMRC should actively encourage employers to voluntarily payroll benefits.
– There should be a legislative P11D exemption for benefits which have been fully taxed and NIC’d via payroll.
– The scope of PAYE Settlement Agreements (PSAs) should be widened. In addition, an online PSA return completion process should be introduced, and the current need for employers to ‘apply’ for a PSA should be abolished completely.
– There should be a clearer definition of certain benefits.
Dispensations to be replaced by a statutory exemption.
– Abolition of the £8,500 ‘higher paid’ P11D threshold.
– Simplification of Travel and Subsistence and other expenses deduction rules.
– Simplification of NICs generally.

Substantial changes may not happen overnight and so employers must continue to meet their existing ongoing obligations. At ET4B we pride ourselves in being able to abbreviate these complex matters significantly, translating these into plain English and simple guidelines, whilst of course keeping a close eye on possible future changes. If you feel ET4B can assist your own organisation in this rapidly changing environment please do not hesitate to contact us.

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ET4Bs Spring 2012 Newsletter

Posted by David on May 01, 2012
Expenses and benefits, HMRC, National Insurance, News articles, Payroll, Status, Termination Payments / Comments Off on ET4Bs Spring 2012 Newsletter

016B_ET4B Spring 2012 Newsletter

This Newsletter contains  details of HMRC’s recent ‘IR35’ update, information on a recent stark reminder for employers operating salary sacrifice arrangements without adequate HMRC clearance, and much more.

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