How will IR35 affect independent consultants after April 2020?

One of the most common worries expressed to me by consultants relates to IR35 and proposed taxation changes.

If this area is new to you and you are concerned, then what follows will give you a general overview.

What is IR35?

Since the 1980s, there has been a big move in UK business circles towards the use of independent contractors and consultants. 

The advantages for client and consultant are obvious – or they were:

• there is no employers’ NI to pay;
• if the contractor takes their income from their own company as a dividend rather than a salary, there is no NI payable;
• corporate taxation rates are lower than those for personal income tax.

However, this trend was and remains exceptionally unpopular with HMRC who see it in many cases as essentially a tax and NI evasion scam.

Their argument is that employers are simply changing the employment status of employees for tax and NI reasons. They contend that many people finish work on Friday as an employee and start work doing the same job in the same place on Monday morning but this time as a “so-called” independent consultant. 

HMRC’s term for such personnel is “disguised employee”.

Their original paper stating their concerns and approaches to stop the abuse, as they perceived it, was the 35th memorandum they issued in that year. This explains the name “Inland Revenue 35”, which has stuck but which has no real meaning otherwise.

Today 

Since 2000, contractors have been responsible for assessing their own status and Tax/NI contributions. This is widely recognised to have been largely ineffective and HMRC believes that continued malpractice is widespread.   

By April 2020, new tranches of legislation will be introduced which will shift that assessment and reporting responsibility to your clients.

This legislation is complex and I don’t have space here to discuss it in full but the key points as they might affect you are:

• the objective of the new legislation doesn’t change – broadly speaking, HMRC wants independent consultants operating as pseudo-employees to pay the same tax and NI as employees,
• in 2017, legislation was introduced to shift responsibility for assessing tax and NI liabilities from private contractors (or their service companies) to public service sector employers. The 2020 change will roll that out to private sector employers too – at least for medium and large company clients; 
• smaller clients may be exempt. They’re defined as companies having two or more of the following:
• less than a ￡10.2m turnover; 
• balance sheet valuation of ￡5.1m or below;
• 50 employees or less. 

This covers situations with clients where your relationship is direct or through an intermediary agency;

• HMRC now have the authority to look at all of your engagement contracts over a period of time to form a view as to whether you are a bona fide independent consultant operating through a legitimate company structure.

What this means

It’s important to remember that IR35 is only seeking to stop the disguised employee syndrome. 

In a nutshell, legally it means that now the contract between you and your client is not, in itself, the governing factor behind deciding the nature of your engagement with them. That ultimate responsibility will pass to HMRC.

Effects on your costs and pricing

There is an online HMRC test (CEST) you can take to help establish your status. Though this test has widely been panned by agents, IR35 legal professionals and industry experts alike as the CEST tool does not align with statute and case law.

Assuming you meet the definition of a de-facto employee, you may be faced with needing to pay up to an additional 25% of your current fees in tax and NI. If your clients qualify as needing to report their calculations, sooner or later you or your service company/intermediary agency will need to pay.

It’s possible that some consultants, thinking well ahead, will have already factored this into their client pricing. Those that have not will find themselves facing the need to either accept a reduction in their income or put up their prices to their clients.

In spite of the government’s incomprehensible view that this will work out to be cost-neutral, it seems safe to predict an overall cost increase to the end customer.

As an aside, previous offshore status workarounds to avoid this has now largely been closed off.

Clients’ reactions

No increase in costs is ever going to be popular with your clients. They are going to like even less the additional HMRC processes and reporting requirements they will need to apply to the use of your services in qualifying conditions.

Two things to keep in mind here though:

• private sector clients typically understand that independent consultants aren’t to blame here. This measure is very unpopular and resented by almost everyone apart from HMRC and the Treasury. Businesses have made their views on that clear to the government, so your relationship with them might stay smooth – though that’s not the same thing as saying they will be willing or able to accept any additional costs arising from this;
• this might re-emphasise again the importance of the SME marketplace, where companies may be exempt from such reporting. 

My opinion and advice

Each individual consultant’s position will be unique to them. As such, there is nothing specific I can say about your particular circumstances.

Note though that these changes may not affect you at all financially unless you qualify as a disguised employee.

Frankly, the application position remains confusing and it will take time for it to become clear. It is advisable to consult with your accountant sooner rather than later.

However, there is one thing I can be absolutely sure of.  The demand from clients for short to medium term independent consultants and contractors is not going away! Whatever HMRC say and do, requirements in this area are likely to continue to be high and will very possibly grow further as a result of various Brexit implications.

Some have speculated this will lead clients to start taking people on as permanent employees rather than independents, as the financial incentives for not doing so will largely vanish.

Personally, I suspect that would be unlikely. The degree of flexibility surrounding the independent consultant is still attractive and using such resource frees clients up from needing to worry about all the other issues associated with permanent employees (e.g. promotions, appraisals, sick pay, etc).

Finally, don’t forget that I have warned regularly about the commercial dangers and limitations of becoming virtually embedded into a single client’s establishment. 

True, it’s convenient so thereby attractive. However, there are many dangers in doing so - and they’re not just about IR35. For example, being in that position can severely limit your options for risk-management through growth and income stream diversification. 

It might be prudent to carefully look at a broader-based marketing and engagement model. IR35 restates that need.

I am always open to discussions about issues affecting our industry and I’d welcome your enquiries for more information.