What will this mean and what can contractors do to survive?
The Chancellor, Philip Hammond, has announced in the autumn budget that off-payroll working rules (commonly referred to as ‘IR35’) will now also be applied to the private sector, with the changes coming into effect from 2020, so as to bring the private sector in line with the public sector.
First things first, what is IR35?
IR35 was first introduced in 2000 to combat tax avoidance by workers supplying their services via a limited company (‘personal service company’), who, but for the personal service company, would be considered an employee (and pay increased levels of income tax and NIC’s as a result). Effectively, such workers were ‘disguised employees’ and benefitted from a net saving in tax of up to 25% when compared to a directly employed individual. The engaging organisation also benefits from significant savings as they do not have to pay employer NIC’s, nor do they have to offer any employment rights or benefits.
If a contractor is deemed to be inside IR35 and labelled by HMRC as a disguised employee, the contractor will have to pay income tax and NIC’s as if their contracting fee income were employment income and the personal service company will face a financial penalty.
Ever since its introduction, IR35 has been criticised as being poorly constructed, confusing and ill thought out. Misleading guidance and a number of questionable online employment status tools (not least the highly controversial ‘CEST’ tool, deemed unfit for purpose by many professional bodies, not least the ICAEW) from HMRC over the years has only served to further frustrate contractors and their advisers.
HMRC estimates that the cost of non-compliance to the exchequer will reach £1.3 billion a year by 2023-24, albeit the same body also estimates that public sector reform of IR35 has raised £550 million in income tax and NIC’s in its first year alone.
Public Sector Changes
In April 2017, the Government enacted a number of highly publicised changes to off-payroll working in the public sector, none more so than switching the burden of establishing whether a personal service company engaged IR35 or not, from the personal service company itself to the public sector body engaging it, leading to many public sector bodies making blanket ‘inside’ IR35 decision and others refusing to engage personal service companies altogether, instead insisting that they use umbrella companies. It is these unfair consequences that has many contractors fearing the worst when the same changes are extended to the private sector. So, what can contractors do to limit their exposure and do they really need to be so worried?
Prepare, Understand and Don’t Panic
If you fail to prepare you should prepare to fail. Acting now will give you a much better chance of dealing with any issues that arise down the road and at least contractors have experienced the reforms already, albeit in the public not provide sector, meaning we now have the benefit of knowing what the reforms look like and how engaging bodies are likely to respond to them once they come into law.
The first and perhaps most important step is understanding what your IR35 status is – this is more important than ever given the reform just around the corner.
IR35 is extremely complex and therefore it is crucial to get expert, professional advice from someone experienced in dealing with IR35. Any review of your IR35 status should include not just the result (i.e. whether you are inside/outside IR35), but also give the reasons for this determination, risk areas and what steps can be taken to strengthen your position in arguing that you do not in fact fall ‘inside’ IR35.
Although HMRC’s CEST tool has been widely lambasted, it remains the case that a contractor’s agency or end client will rely almost entirely on the result of it in dictating what action they take. This is despite the fact that there remains no requirement for contractors to use, or indeed for HMRC to accept the result if they do. As such, it is advisable for contractors to take the test and use the results to see how your contract and/or working practices can be changed so as to ensure you can be deemed ‘outside’ IR35.
Consulting with and entering into constructive dialogue with your client and agency is also important and therefore the need to talk with all parties and uncover how they intend to approach the reforms cannot be understated. If you have assessed your IR35 status and obtained supporting evidence, work with your end client/agency to ensure that your status is properly recognised and dealt with.
At worrying times such as these, it is also key to gain some perspective and remember that these new reforms will not apply to the smallest 1.5 million businesses, nor will the reform be retrospective, with HMRC instead saying it will focus its efforts on ensuring business compliance rather than focusing on historic cases.
This latest announcement is not the final nail in the coffin, with a further consultation on the detailed operation of the reform being published in the coming months, such consultation informing the draft Finance Bill legislation, which is expected to be published in Summer 2019.
Lloyd Clarke is an IR35 specialist, having for many years advised personal service companies in assessing their IR35 status, putting in place mechanisms and safeguards to ensure they fall ‘outside’ IR35 and responding to HMRC enforcement action on behalf of his clients.
If you have any questions regarding the recent private sector reform or IR35 generally, please do not hesitate to get in contact with Lloyd on 01206 239761 or email email@example.com. You could also visit our IR35 page which is packed fall of useful information.