April 2020 IR 35 extension to private sector – will this be retrospective?

Dec 09, 2019

HMRC has now set out its approach to the operation and enforcement of the new rules which extend the IR35 off-payroll working legislation to the private sector from April 2020. This also addresses scenarios where HMRC may take retrospective action. HMRC has also now released the enhancements to the Check Employment Status for Tax (“CEST”) tool.

The relevant section in the recently published briefing note reads as follows “HMRC have taken the decision that they will only use information resulting from these changes in treatment to open a new enquiry into earlier years if there is reason to suspect fraud or criminal behaviour”.

However, readers are advised that whilst this suggests no retrospective action in non-fraud cases, this guidance in not statutory and is therefore at the discretion of HMRC. On a strict basis, UK tax legislation allows HMRC to open enquiries into earlier years under the ‘discovery’ rules where there is an inaccuracy in employment status.

HMRC has also now released the enhancements to the CEST tool which is now live. Alongside the CEST tool, HMRC has also published specific guidance designed to provide users with greater clarity on the factors used to make determinations.

Some agencies consider that the small organisation exemption in these rules equally applies to agencies in a labour chain in addition to end clients. However, this exemption will only apply where an agency engages a personal service company (PSC) in its own organisation, (i.e., where the agency itself is the end client). The small organisation exemption therefore does not apply in cases where the agency (which may meet the definition of ‘small’) provides PSCs to an end user who is not small.

The small business exemption uses the existing definition of ‘small company’ in Companies Act 2006 (CA 2006) for incorporated businesses.

To be classed as small and therefore be exempt from the rules, the company must meet at least two of the following requirements:

  • annual turnover of not more than £10.2 million;
  • balance sheet total of not more than £5.1 million;
  • average number of employees no more than 50.

For unincorporated businesses only the annual turnover test of £10.2 million applies.