IR35 in the Private Sector

IR35 is an anti-avoidance tax that has been around since the turn of the century. It’s objective is to prevent individuals that would otherwise be an employee from engaging via a limited company and receiving the tax benefits associated with being in business. Since its introduction, IR35 has caused controversy with those in the supply chain (contractors, agencies and end-clients) and policy-makers: the former finding the rules confusing and the latter believing it to be ineffective; change has therefore been long overdue.

In April 2017, reforms to the way in which IR35 status is determined for contractors working in the public sector took effect. This put the determination of IR35 status into the hands of the end-client rather than the contractor, as it had been since 2000. Since then, there has been speculation in the contracting community about extending the same changes into the private sector; this was confirmed by the Chancellor in the 2018 Autumn Budget and is scheduled to happen in April 2020.

The definition of IR35 itself, or indeed the precedents that characterise an individual’s employment status, have not changed with this announcement – this continues to rest on 50-year-old case law – Ready Mixed Concrete (1968). Therefore, logically, if IR35 has been operated correctly by the contractor in the past; and the legislation is operated correctly by agencies and end clients in the future; then only those that are already caught by IR35 will be caught in the future. Unfortunately, we do not live in a world where all the information that is given to us is perfect, where legislation is interpreted as it was written or applied as intended – the reality could therefore be very different from this.

In the public sector, there was wide scale mis-understanding about the IR35 reforms perpetuated by a lack of information from HMRC, a Check Employment Status Tool (CEST) that was not fit for purpose and self-interested advisers using scaremongering tactics to promote alternative models. This led to blanket IR35 decisions across groups of contractors with no consideration given to circumstances of the individual engagements. Although HMRC deny this, from speaking to contractors involved in these projects at the time, the changes had ramifications on the delivery of public sector projects, ultimately at increased cost to the taxpayer.

The requirement for the skill-sets and flexibility offered by contractors does not change with the introduction of this, or any, legislation; demand for contractors will continue post-2020. What this legislation does, is shift risk up the supply chain to end-clients, putting the IR35 status of contractors in the hands of the end-client, whose risk appetite will determine how contractors are engaged in the future.

End-clients that are unwilling to accept the risk of engaging with contractors outside of IR35 will have to place them inside IR35 and quite possibly pay a premium to compensate for the tax loss to the contractor. Those end-clients and agencies that take time to understand the legislation are the ones that are most likely to be able to plan for it and ensure their contracts are firmly outside IR35. It stands to reason that contractors with niche skill-sets (high demand, low supply) will be in a better negotiating position when it comes to rates/contractual terms.

The government has pledged extensive support and guidance to assist end-clients to implement the reforms and to work with stakeholders to improve the controversial CEST tool. A further consultation on the detailed operation of the reforms will be published, which will, in turn, inform the finance bill in Summer 2019.

It is hard to see that the reforms announced in the budget will not mandate change in the contracting market, what that will look like post-2020, for the moment, is anybody’s guess.