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IR35 changes for the private sector – the “reasonable care” test

Tax specialist Chris Thomas explains the “reasonable care” test when it comes to determining status. 11 Apr 2019

IR35 – meaning of “reasonable care”

As you may know the government recently published a consultation paper with its proposals to extend off-payroll working rules to the private sector, the new IR35 regime. The new rules, from April next year, are intended to make sure that individuals who work like employees pay broadly the same employment taxes as employees, regardless of the structure they work through, typically a personal service company. One of the most important parts of the proposed legislation is the requirement for hirers to show ‘reasonable care’ when making status determinations - and this has just featured in an article by Personnel Today. The article points out, rightly, that the test is absolutely crucial - if you can demonstrate that you have taken reasonable care, you should have no tax risk. If not, then you face a tax bill for all those contractors incorrectly assessed and for some businesses that could amount to a lot of people and a lot of money. And the stakes are high because we know already that HMRC has significantly ramped up its stance on enforcement across the board, a point we will come back to shortly. So with his thoughts on this “reasonable care” test, tax specialist Chris Thomas:

Chris Thomas: “This concept of reasonable care is quite central to the way the legislation has been drafted and what it effectively is saying is - we have referred to the fact the end user has to make a determination as to whether a particular individual, or perhaps category of individuals, is within scope of IR35 or not, whether they would be a deemed employee or not - the legislation says they have got to take reasonable care in making that decision. That is quite a thorny subject because they have not defined what reasonable care is but I think the assumption has to be that you are going to need quite a robust model for being able to justify the conclusion you have reached. Say, for example, at one extreme if you were to run HMRC's Check Employment Status for Tax tool for every single individual, and that has its flaws as we all know, but if you were to make an assessment for every individual then clearly that should be fine but that simply might not be very practical for people who have got thousands of people engaged through these structures so it might not be feasible to do that so the question then arises well if you just bundle people together from roughly similar roles is that reasonable? Can you base it just on what the contract says when we all know that sometimes the contract doesn't necessarily reflect what actually goes on in practice, and it might vary depending on the particular circumstances of what they are doing. So it is coming up with some kind of risk assessment that is credible and not making sweeping generalisations but is practical enough to be able to be functional for the organisation to operate, so that is the challenge there, and I think if the company can show it has made good efforts to do that and it has a credible system then it should be okay but it is a slightly unclear area."

That risk assessment which Chris mentioned, which involves an audit of your workforce and a careful review of your current operating model, is the key step to consider taking in readiness for the new regime which kicks in next April. We are already helping a number of clients with that now so please do get in touch if you need help with that.  

Training – Equality: an ever changing agenda

On to training and now open for booking is our Open Course “Equality: An Ever Changing Agenda” which is running next month in Manchester on 1 May and then in Birmingham on 14th. It is a half day course starting at 10am, ending at 1pm, followed by lunch. With more on this, national trainer and course designer Trish Embley:

Trish Embley: “Our Open Course in May is "Equality - the ever changing agenda" and like many of our public courses we design them as a reaction to the trends that we are picking up on working with our clients across a variety of sectors. With equality what we have noticed is that it is no longer, if indeed it ever was, a matter of pure compliance. Most of our clients see equality as a representation of their values. It affects their brand, and of course, it has a significant impact upon recruitment and everybody wants to be an employer of choice. What we know from various reports is that particularly millennials are very focused on diversity and inclusion issues. According to one report, for example, 75% of millennials would like to work flexibly. So obviously on recruitment we want to be able to attract the brightest and the best and that can sometimes be complicated if whoever is making the recruitment decisions is, for example, influenced by subconscious bias, completely unconscious and unwitting. So what we are doing on this course is touching on that subject and how HR can support managers to recognise any unconscious bias they might have and to mitigate against it. Of course under this topic of equality harassment has, and continues to be, a big issue and the government is looking at producing a new code of practice so we will be exploring what that might look like, and then just continuing to support HR to support their managers to take proactive steps to make sure that their workplaces are not just diverse but also inclusive and everyone feels valued and respected and comfortable. Finally we are also going to look at trans-inclusivity and that will give us an opportunity not just to touch on the legal requirements but as an organisation that is very proud of our Stonewall number one ranking as top LGBT employer we have done a lot of work in-house on trans-inclusivity so it gives us an opportunity to share some of our initiatives with our clients and help them to maybe think about how they could take some of those initiatives in-house to assist with their own D&I strategies and plans."

You can book a place on that course directly from our website.

NMW enforcement – HMRC not backing down

The Revenue has rejected calls from retailers to end enforcement action against mere technical breaches of the National Minimum Wage Regulations, an approach which retailers say is unfairly targeting them. HMRC has told the CIPD’s People Management that it has sent a letter to the British Retail Consortium (BRC) spelling out the regulations around the issue are very clear and it will not be changing its approach. The letter is in response to a call earlier this year from the BRC to pause which it called “unreasonable” enforcement where employers have inadvertently fallen foul of the current system, which it claims is outdated and does not reflect the flexibility offered by the retail sector today. In its response HMRC says it has not specifically targeted any particular forms of deduction, but that it did have a legal duty to recover wage arrears on behalf of employees when it found evidence of breaches whether technical or otherwise. Of particular contention are rules around salary sacrifice schemes, which have caught out a number of large employers. Late last year, it emerged that Iceland could face a bill of £21m in underpaid wages because it broke NMW rules through a voluntary salary sacrifice scheme designed to help employees put money aside, which may have pushed their take-home pay to below the minimum wage. Also Debenhams, which has just fallen into administration, was fined £63,000 in 2017 following what it said was a “payroll miscalculation”. This type of breach, and HMRC’s to it, is something we have been warning our clients about for some time and this latest message from HMRC shows that picture is unchanged:

Jon Fisher: “The National Minimum Wage legislation is very complicated and a lot of employers inadvertently breach the legislation, not at all deliberately, sometimes it's just a system error. sometimes it's just an incorrect interpretation of the rules particularly around things like salary sacrifice and uniforms and the criticism of HMRC is that they are not looking at intent, they are just penalising everybody where they see there being a technical breach and most employers will have committed a technical breach at some point but HMRC are absolutely adamant that there is no such thing as a technical breach, a breach is a breach and they will look to punish everything in the same way and that's way you get the controversy around Iceland where they were trying to do a good thing that actually benefits employees but HMRC aren't applying any kind of proportionality here or looking at the wider picture, it's very much just looking at the rules. The one silver lining in all of this for employers is there is a consultation which is trying to simplify some of those breaches but it certainly will not deal with all of them and at the moment it is just a consultation and it is not clear when those new rules will come into force relating to salaried workers and salary sacrifice schemes which will help smooth out some of the issues but as far as we are concerned HMRC are going to continue this approach of a breach is a breach so it is very important that people comply. The complexity of the national minimum wage rules has caused a lot of inadvertent breaches and one of the big ones is around salary sacrifice because what HMRC look at is the post-sacrifice pay, so the pay after you have sacrificed your salary and then look at that to see whether it complies with the national minimum wage. So you can't sacrifice your pay below national minimum wage levels. You can put in place a payroll fix to make sure that doesn't happen on your system but now with a lot of people doing salary sacrifice for pension contributions with the pension contribution going up to 8% for some employers from an auto-enrolment perspective it is very important that employers double check that that extra pension contribution, if it is to be made by salary sacrifice, isn't going to drag pay below national minimum wage levels because you have got the double-whammy of the pensions contribution going up at the same time as the national minimum wage going up as well so you just need to really focus on that because employers are at increased risk of breaching the rules and they need to make sure that that salary sacrifice is not dragging pay down below the £8.21."

Jon mentioned the consultation on this. It closed on 1 March and the government is currently analysing the feedback. As soon as we have their response we will, of course, let you know.

For now from me that’s the news. Good bye.

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