Potential IR35 and PSC reforms leaked

23rd November 2015

Proposals for reforms to IR35 and the rules on personal service companies (PSCs) have been leaked by a ‘government source’ to the Guardian.

According to the proposals, no longer will PSC contractors be able to work for a single client for an uncapped period. But, contrary, to what was initially reported in the newspaper, they will not “be obliged to move on to the [client’s] payroll if they work … for more than a month,” as long as they pass a test.

The test, which will be available online, is set to be the new version of the Employment Status Indicator (ESI) and will probe for Supervision, Direction or Control (SDC), “much in the same way as the onshore legislation [does].”

The latter quote is a staffing body’s advice to its members, who have also been informed that the proposals are “confirmed” as accurate by a “high level” Treasury source.

However, the staffing body is privately briefing its member agencies that “the only carve out” from taking the SDC test after month “one or two”, is if the PSC contractor has “more than one client at a time”.

With regards to whether or not a PSC contractor is “inside IR35”, this remains unclear.

The body believes it will be the client – in line with the IR35 “discussion document” – but it also told its members, who place contractors across the UK, that it “could be the intermediary”.

ContractorUK attempted to obtain comment from the Confederation of British Industry (CBI) but the body admitted they had no knowledge of the proposals, nor was it briefed on anything similar at its recent conference.

An HM Revenue and Customs (HMRC) spokesman declined to comment too, but the tax authority is thought to be “developing an online digital service to help IR35 customers work out whether the rules apply to them”.

David Gauke, Treasury minister, revealed in a letter last month that HMRC’s new IR35 service is “due for release in 2016”.

An unnamed legal firm, specialising in contractor compliance, said: “Eventually, clients will have to verify that their PSCs don’t have to operate IR35.

“And people with their own PSC will ultimately have to prove that they have the right not to operate IR35.

“They’ll have to supply the result from a new ESI test, which I’m absolutely certain is going to be revamped to include SDC. If your contract is over two months, then prepare for the ESI test.

“PSCs will then use the ESI test result [if it’s an ‘outside-IR35 outcome] as proof that they can continue contracting as a PSC, assuming they’re not a Managed Service Company.”

The source, which sat at roundtable meetings with HMRC in September on IR35 reform and T&S relief, believes HMRC is going to record the individual reference numbers of ‘IR35-caught’ responses that the revamped ESI throws out.

“It will be an online system but the current ESI doesn’t track personal details so the onus is going to be on engagers to ensure that they have the reference numbers of their PSCs.

“In this way, clients will have to verify that their PSCs don’t have to operate IR35. The Revenue’s end game is to have one single test that includes SDC for both expenses and status, so PSCs must test to see if they are free from IR35 and free from restrictions on tax relief on travel and subsistence expenses.

“But it’s almost not necessary; if you’re caught by IR35 because of SDC, then you’re not going to be due any relief on expenses. It seems though that T&S reform will hit contractors before IR35 reform.

“Everyone agrees that HMRC bolted the stable door after the horse had gone with IR35, and it’s true to say that the new, ‘improved’ version of IR35 would bolt the door but also starve the poor horse to death.”

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