Corporate Tax & Incentives

Recent tribunal decisions in relation to the tax status of Lorraine Kelly and Kaye Adams under IR35 have again thrown into the spotlight the difficulties faced when trying to assess whether a self-employed contractor operating through their personal service company (PSC) is “inside IR35” or “outside IR35”.

As Julie Kier highlighted in her blog in March this is a risk which private businesses engaging contractors through personal service companies in the private sector have been sheltered from.  However, many will have to grapple with the issue from April 2020.

The consultation period in relation to the ultimate shape of the rules has ended but we have yet to see the final legislation.  In the meantime, we are seeing companies use the time between now and April 2020 to understand the impact the new legislation may have on their business model and how they can manage the new compliance requirements and risks.  Although there is time, there is a lot for some organisations to do.

Two aspects of proposed rules outlined in the consultation could have a significant impact on the compliance burden for some end user clients if they make it into the final legislation:

  1. Assuming the liability of other employment businesses

The requirement to reach the status decision falls on the end user client, but the obligation to deduct the tax falls on the UK entity which pays the PSC.  Where there are employment businesses in the contractual chain and the fee payer defaults on its obligation to deduct employment taxes, it is suggested the liability should flow back up the chain to the end user client.  This will be of significant concern to businesses – particularly those operating a hiring model which involves complex or lengthy contractual chains.  If the proposals are adopted, end user clients will need to have a deep understanding of the employment businesses they engage with to establish whether they are comfortable with this risk or consider a change to their hiring model.

  1. Appeal procedures

The consultation suggests a requirement for end user clients to set up internal appeal procedures to allow contractors to dispute status decisions.  Private companies who are caught by the new rules should be acting reasonably to reach a status decision. Those who value their flexible workforce are unlikely to reach an “inside IR35” status decision without proper consideration but given the difficulties in reaching a status determination, disputes seem likely from contractors who consider themselves to be “outside IR35”.  Assuming the decision by the end user client was reasoned in the first place, appeals may turn out to be no more than a business disruption – in the absence of new facts it feels unlikely that an end user client will reach a different conclusion when looking at it for a second time.  If this provision makes it into the legislation, businesses will need to think carefully about how they implement and communicate their status decisions and design their appeal processes in a way which mitigates the disruption.

The full extent of the compliance burden on companies should become clearer this summer when draft legislation is made available.

How we can help

We’re working with clients to help them assess and mitigate the impact of this new legislation on their businesses.  If you would like to discuss the implications for your business please get in touch with your usual Brodies contact.

Karen Davidson

Partner at Brodies LLP
Karen has twenty years’ experience of advising on the tax aspects and structuring of corporate mergers and acquisitions, investments, joint venture arrangements and reorganisations and has led the tax advice on a number of the large high profile corporate transactions in Scotland. She also provides structuring advice in relation to real estate transactions including VAT and LBTT and employment tax issues.
Karen Davidson

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