If you work in the private sector, how much thought have you given to the possible implications of IR35? The updated legislation is due to take effect from April 2020. While there are still questions left unanswered about the finer details, companies need to be aware of its potential likely implications and put steps in place as soon as they can to mitigate the impact.
What is IR35?
The IR35 legislation initially came into force in April 2000. The legislation was intended to deal with tax avoidance by flushing out ‘disguised employees’. These are workers who supply their services through an intermediary – often a limited company – but where their day to day working practices are more akin to being a regular employee.
This arrangement meant the company engaging their services did not have to pay employers’ NICs or offer employment rights and benefits. They also did not have to face unfair dismissal claims or make redundancy payments if the work came to an end – they could simply terminate the contract. From the contractor perspective, the situation offered a stable working arrangement while paying less tax than if employed.
IR35 never really achieved what was intended so to address this and to tighten the assessment process new off-payroll working rules have been introduced in a staggered roll-out starting with the public sector in April 2017.
One of the changes is that the engaging organisation, rather than the contractor, decides whether the individual is inside or outside IR35. If an organisation gets it wrong, they face penalties and must retrospectively make any payments that should have been deducted at source.
The new rules clearly have a considerable financial impact on the contractor in terms of future earnings – it’s already proving controversial with complaints that contractors are being put into a situation where they are taxed as full-time employees and required to pay income tax and NICs yet without any of the benefits and protection of employment rights.
Past working arrangements might also be re-evaluated to see if they should have been classified as being inside IR35 and taxed accordingly. The risk of retrospective review remains a situation that is worrying for many contractors – as illustrated by the experience of BBC presenter Christa Ackroyd.
Off payroll working rules in the private sector
From April 2020 the off payroll working rules will come into force within the private sector (with some small company exemptions). In March of this year, the Government launched a consultation on the implications of the rules. The consultation only finished at the end of May and at the time of writing the analysis of the feedback is still underway.
But this is causing concern about exactly what is in store, and how much time could be left for companies to ensure they are in compliance. And there are also questions raised by the public sector experience.
Joint IPSE and CIPD research revealed more than half of managers lost contractors after the tax rule change with many contractors deciding to seek full-time employment instead.
Almost three-quarters of respondents were struggling to hold on to existing contractors and finding suitable contractors had turned into a more expensive and time-consuming activity.
Not something the private sector will be delighted to hear – particularly with so many companies already wrestling with the uncertainties and potential complexities connected to Brexit.
What can you start doing now?
Some private sector employers are already looking at what they can do to manage the IR35 situation. However, there’s a concern that many companies are not aware of the implications or are doing any planning.
If you haven’t already done so, it’s prudent to start talking about the situation with the contractors you use to begin the process of reviewing their status.
One way to do this is by working through the CEST tool on the GOV.UK site. The usefulness of the tool has caused some debate with quite a few doubts expressed over its accuracy. And it has been reported that many status disputes going to court are deciding on a status that’s different to the CEST outcome. But it’s still a sensible place to start the debate – particularly given that whether it’s been used in deciding a contractor’s status could be taken into consideration if there’s a dispute further down the line.
Ultimately you are responsible for letting the contractor know what your conclusions are about their tax status. There could be differences in opinion, but it’s far better to resolve them with the individual directly wherever possible.
Remember, HMRC can look at the contractor’s circumstances whenever it wishes. Amongst other things, it will scrutinise how much control your business has over the assignment completion. It can examine how far work is person specific. It will look at how obliged your company is to offer employment and how obliged the contractor is to take it on. So you need to be able to justify the conclusion made regarding each contractor.
If you conclude they are inside IR35, start weighing up the options. Depending on your reliance on your contractors, you might want to consider the possibility of taking them on a short term or even permanent employees if they are prepared to do so.
You might also want to review recruitment planning in the event of reductions in the size of the pool of contractors with the skills your business needs.
With so many companies relying on the use of contractors, IR35 looks set to have far reaching consequences. Many hope the consultation, and public sector experience, will help ensure the private sector roll out is as smooth as possible – but the clock is ticking and employers won’t have long to get ready once the finer details are confirmed. The message is that if you haven’t started thinking about IR35 already, it would be wise to do so – and quickly.