Big Changes for Private Sector Businesses in IR35
Back in 2000, legislation was introduced to ensure individuals who operated as independent contractors but who worked like employees, paid broadly the same tax and national insurance contributions as employees. The ‘off-payroll working rules’ are commonly referred to as IR35. With around 900,000 contractors operating in this way, this legislation affected a not insignificant part of the workforce.
When the rules first came into force lots of individual contractors who provided their services through a personal services company (a PSC) to organisations were caught by the rules and deemed, for tax purposes, to be employees. It was up to the contractor to decide whether they fell within the scope of IR35 (so should pay tax and NIC like an employee) or not.
During the period since the rules were first introduced, HMRC have brought some cases against contractors who they felt fell within IR35. Also, some contractors received IR35 letters asking them to justify why they fell outside of the rules and lots of complaints were made about how complicated the system was to determine whether somebody fell within or outside of its scope. Contractors who were assessed as being within IR35 by HMRC for tax purposes also felt it was unfair that they didn’t get any employment law rights as an employee; the legislation purely related to their status for tax purposes.
Reforms in the public sector
In 2017 there were big changes for public sector contractors. The government believed there was widespread tax fraud being committed by the contractors and sought to prevent this by changing the rules, putting responsibility on the public sector organisations receiving the services to decide the status of the contractor for IR35 purposes.
According to HMRC “PAYE receipts and independent research on off-payroll working in the public sector suggest that this reform has been effective in increasing compliance in the public sector without impacting labour market flexibility”. However, there is widespread commentary suggesting that the reforms have not been quite as well received as this HMRC statement would have you believe. Many contractors reported that several organisations decided to blanket assess all contractors as within IR35 and the increased levels of tax the contractors were required to pay were not offset by increased contract rates.
It is not surprising that the public sector organisations made such risk adverse decisions, as the legislation places liability firmly at the door of the organisation if HMRC investigates and finds any mistakes in determining IR35 status.
Some commentators say this has led to contractors leaving the sector, resulting in a skills gap and delaying projects. The reforms are said to have raised an additional £550m for HMRC but it isn’t clear that they have a) improved compliance with IR35 or b) taxed people fairly. Since the 2017 reforms there has been a marked rise in cases being taken by HMRC through to Tribunal, albeit with mixed results for HMRC.
Now for the Private Sector
So with all that in mind, it was unwelcome news to the private sector when the Chancellor announced in the 2018 Budget that the new rules would be extended to the private sector from April 2020.
Earlier this year, HMRC launched a consultation document seeking views “…to understand how best to implement the reform in the larger and more diverse private sector.” The consultation closed at the end of May and we await the summary of responses that will be distributed by HMRC before the end of 2019.
There has already been an initial consultation in 2018 and as a result of that the new rules will not extend to small businesses. To determine this, HMRC is using the definition of a small business in the Companies Act 2006 (a small business must satisfy two or more of these conditions – annual turnover not more than £10.2m, balance sheet total not more than £5.1m, or not more than 50 employees).
How can I get ready for the changes?
Whether you are an organisation or a contractor, it is sensible to get all contractor documentation reviewed for the purposes of IR35 by a professional advisor.
HMRC has a testing tool, ‘Check Employment Status for Tax (CEST)’ for determining if somebody falls within the scope of IR35. While this may be a good starting point, many experts have warned against it as the sole way for determining a contractor’s status. Instead they recommend independent contract reviews as being a much more accurate way of assessing the IR35 status.
You should also seek professional advice about your working practices to ensure that you are not inadvertently treating contractors like employees, notwithstanding what the contract says. The level of control and supervision, the ability to use a substitute and the mutuality of obligations are all factors to consider.
Once reviewed and deemed to be outside IR35, contractors should seek written confirmation from the organisations that engage them of this to deter organisations applying a blanket assessment of contractors post April 2020. Contractors and businesses should start to gather evidence to demonstrate that contracts fall outside of IR35, such as details of concurrent contracts, examples of when contractors have been sent home due to lack of work, details of staff meetings that contractors were not required to attend etc.
For contractors and businesses preparing for the changes, we can provide reviews of contracts and working practices to assist in determining whether IR35 may apply.