If you have ever worked as a contractor, you will have experienced the shadow of IR35, first introduced by the then Chancellor, Gordon Brown in 1999, to address what was considered tax avoidance through the use of personal service companies (PSCs).
Over the years, IR35 has received plenty of criticism and been subject to much discussion, but it’s remained largely unaltered, save for internal changes in its application by HMRC.
In 2015, in a surprise move, the Government moved the responsibility for determining the IR35 status from the individual to the employer, in all public sector companies.
The changes came into effect in the tax year starting in April 2017, and despite ample time to prepare, many public employers were just not ready, which had far-reaching implications. Some plainly issued blanket bans on contractors working through limited companies, a move that has all but eradicated personal service companies from the supply chain, and led to a considerable upswing for umbrella companies.
As part of the toolkit, the Government also released a test to be used to check one’s status under IR35, the CEST (Check Employment Status for Tax), to support employers with their new responsibilities. However, the test has received widespread criticism as being inaccurate, as well as returning ‘flawed assessments ’, and maintains it’s only meant to provide guidance.
Later on, in the same year, Matthew Taylor, chief executive of the RSA and a former advisor to Tony Blair, concluded his review of modern working practices in Britain. The recommendations, if adopted and implemented by the Government, could lead to several changes for the contracting community, and potentially IR35. However, in an interview on BBC’s MoneyBox, Taylor assured that the review wouldn’t burden professional contractors.
In October 2018, as many had expected, the Chancellor announced that the off-payroll working rules would be extended to the private sector, popularly termed IR35 2020. The announcement was met with little enthusiasm by both the contractor community and the private sector given the widely held view that the impact of the new rules to the public sector was severe, and that far from all concerns that were raised have been heeded by the Government. The fear is that many of the issues that affected the public sector will simply be repeated once more in 2020.
The contractor website contractorcalculator.co.uk published a comprehensive criticism of the move by the Chancellor and subsequently launched a campaign to put a stop to the expansion to the private sector. So far the campaign has not had much of an effect, and the change looks certain to go ahead as planned in April next year.
If you’re on the hiring side, or an engager, the main thrust is that you will be responsible for setting all contractors’ tax status with regard to IR35 and deal with the subsequent contract negotiations as well as managing the different ways they are taxed (additional employer’s NICs, VAT, PAYE).
Under the proposed rules, the engager needs to exercise reasonable care when they make their decision. If this can be demonstrated, there should be no tax risk to the company. However, HMRC has so far given little actual guidance in terms of applying it to IR35, but given we’re a year away, this is likely to change.
In the latest consultation, HMRC has also indicated that it will require a hirer to be able to provide reasons for each IR35 decision. To effectively be able to manage this, it’s expected that businesses will need to put robust processes in place, that not only ensure the rules are followed in respect of status, and any subsequent changes in how individuals or PSCs are taxed, but also that the contractors themselves have a route to challenge a decision.
The Government is also likely to require enhanced reporting to take place, something that will add burden to already stretched HR departments.
The rules will not only be applied to new contracts from when they are implemented but also to existing contracts. Firms with contractors on their books should start acting as soon as possible to deal with those cases; not only will it ensure a smooth transition in 2020, it will also constitute a test bed for the internal processes that need to be put in place.
Individual contractors, on the other hand, need to be aware that their current contract will be reviewed at some point running up to the 5th of April 2020. They should also make sure that they fully understand both the law and its ramifications, the new process their client is to deploy, and what their recourse is in the event of a change in status.
Whilst the decision lies with the engager, one would imagine that there would be some flexibility between inside or outside of IR35 by changing the nature of engagement. And should they eventually find themselves inside IR35, they would be exposed to the same PAYE taxes as a regular employee, in addition to employer’s national insurance contributions.
There is no question that the impending change will challenge many organisations, as well as bring about potentially detrimental change to some contractors and PSC owners, but there is still time to act. Start today, read about the detailed plans, brush up on the law, ensure you establish communication with all concerned parties, and start auditing your workforce. And where you fall short or find gaps, we, along with many others, will be here to support you.