IR35 - How prepared are you?

“IR35” or as its now often referred to “off payroll working” was introduced in April 2000 to combat disguised employees and requires contractors operating through a Personal Service Company (PSC) to pay additional taxes and National Insurance (NI) similar to employees, where they are caught by the rules.

To date the complexity of the legislation has made it difficult to assess a contractor’s status with certainty. This has also made it difficult and costly for HMRC to enforce and where they believe there have been breaches and taken legal action it has often resulted in failure.

The lack of clarity and enforcement has resulted in a belief that many limited company contractors are not paying the correct levels of tax as they are declaring themselves outside IR35 and thus paying significantly less tax and NI.

In 2015, however, HMRC conceded that IR35 was ineffective and that “non-compliance with the legislation is widespread”. In May 2016 HMRC released a consultation aimed at reforming the rules for PSC contractors operating in the Public Sector.

The proposals were to change who assessed the status of the assignment as well as who was responsible for the deduction and payment of the tax where the rules applied. The changes proposed for April 2020 are essentially to bring the private sector in line with the public sector. However, given the well-publicised wrangles between HMRC and employers and subsequent reports of skills shortages in some industries due to changes in the tax status of contractors, many private sector employers have voiced their concerns about IR35.

Determining whether IR35 applies to your contract is a complex matter but there are three key principles to follow that will determine an IR35 status:

Supervision, Substitution and Mutuality of obligation.

Although these words have definitions, they are open to interpretation so you can start to see why this isn’t a straightforward matter as there is no hard and fast rule and all a bit fluffy which is probably why HMRC have struggled to enforce its regulation.

There are lots of things to consider, such as; Is it a contractor who is basically doing the role of a permanent employee or is it a one-off piece of work being undertaken by a specialist? Is the person part of the hierarchy? Do they attend training? Are they treated as an employee? i.e. are they given equipment to use? Invited and paid to go to the Christmas party? These sorts of things are key, as it doesn’t matter what’s written in the contract if what’s happening in practice points to them being treated and used as an employee.

In very simplistic terms, today in the private sector contractors themselves are responsible for determining if the role they are doing is in or outside of the regulation and if outside they receive pay via a PSC as a self-employed person rather than PAYE. Unsurprisingly in most cases contractors will rightly or wrongly consider the role outside of IR35 and thus pay significantly less tax amongst other differences.

Now HMRC believe that by changing who determines if the role is inside or outside of IR35 from the contractor to the client, they are more likely to accurately assess the role and more roles will be determined in scope and therefore more revenue for HMRC as the tax payable under PAYE is far higher than via a PSC.

What appears to be a very small change could have some pretty big ramifications for both the client and the contractor. Its estimated 1.1 million contractors in the private sector will be affected by this change and could result in any number of outcomes but not least contractors being asked to convert to PAYE resulting in either the client paying more or the contractor receiving less (or both), less transformation as costs rise significantly or contractors moving away from contract space all together.

Now in many cases where roles are genuinely a short-term assignment for a one-off piece of work and a specialist is required to complete the statement of work then they will be classed as out of scope of IR35 and can continue as they do today. The end client will make the assessment and can continue to use a contractor through their PSC or most likely via a 3rd party agency. However, an incorrect assessment could be a costly mistake as HMRC could claim for any unpaid PAYE tax and NI for the duration of the contract(s), which could quickly add up to a large sum of money and of course reputational damage.

HMRC does have a CEST tool which they recommend to be used to help with determining a contractors status, however it’s open to interpretation and whilst it gives an “in” or “out” response, it gives no explanation as to why or to what degree its considered “in” or “out”, so not particularly helpful and shouldn’t be relied upon in isolation. Lorraine Kelly won a court case over tax in March 2019 after CEST misjudged her status. Just to add to the confusion, the results coming from the courts on status disputes are, in many circumstances, completely different to the results given by CEST. Therefore, most experts recommend seeking legal and tax advice to ensure businesses can be confident they have the right processes in place.

What happens next? Well consultation was released 5th March 2019, comments/feedback had to be received by 28th May 2019 and the output is expected in the coming months but given the gravity of the proposed changes, the disruption caused in the public sector, the recent political changes (who knows what Boris will do) there is a chance not everything will be confirmed until nearer the time. If you wait until everything is fully finalised then it might not leave you enough time to make the required changes in your business to be compliant.

If you are a contractor:- If you sign a contract before the changes that takes you into or past April 2020 then find out how this affects you. Companies will be obliged to tell you what the status of your role is, so if they don’t tell you then ask. If you contract with a Small and medium-sized enterprises (SME) then bear in mind the current proposal is that SME’s will be exempt from these changes, so the onus remains with you to determine the status.

If you are a client:- Seek legal/tax advice. Start looking at how these proposed changes will affect you. Review your contracts and equally if not more importantly look at how you deal with contractors versus permanent members of staff (HMRC won’t just look at a contract they will look at the practice). If you offer a contract that goes into or past April 2020 checks its compliant. Do you use agencies to hire contractors? If yes, then talk to them about how they plan to handle the changes. If someone uses an umbrella company, check they are a proper umbrella company i.e. pay PAYE.

We are teaming up with legal experts to help our clients and associates understand and deal with these changes, get in touch if you want to attend one of our events or see how we can help you in the new IR35 world.

To find out more about us visit www.simplifyconsulting.co.uk or to register your interest for future events including IR35 email us on [email protected]