IR35 - no longer a case of if, just a case of when…

Major taxation changes for contractors in the private sector are likely to come into effect - more competent and robust tools are necessary to protect against major fallout.

Rolling out IR35 in the private sector

For those of us in the world of contracting, there really is only one big story at the moment - other than Brexit of course - and that it is the potential roll out of the intermediaries legislation to the private sector. A recent article in The Recruiter asked ‘Is Private Sector Off-Payroll Battle Over?’ giving a glimmer of hope that there might be a u-turn ahead – perhaps someone at HM Treasury flicked through their calendar and realised there was ever such a little diary clash with some important news coming in March 2019.

But no, all the article tells us is what we have suspected since the legislation for Personal Services Companies (PSCs) changed in the public sector in 2017; that in the Autumn Statement on 29th October 2018, Mr Hammond is likely to announce similar changes are to be rolled out to the private sector.

It appears, therefore, it’s now no longer a case of if the changes are to be introduced, but merely when.

Explaining the controversial legislation

By way of background, IR35 is a piece of (controversial) tax legislation that came into effect in 2000. It was introduced to combat tax avoidance by workers supplying their services to clients via an intermediary, such as a limited company, but who would otherwise be an employee if the intermediary was not used i.e. disguised employment.

If found to be ‘inside’ IR35, contractors have to pay income tax and National Insurance Contributions (NICs) as if they were employed, resulting in a significant financial impact through additional income tax and NICs.

The new proposals include changing the party in the supply chain which has responsibility for determining if the role is inside or outside IR35. Under the new proposal, the responsibility will transfer to the end hirer who will be required to take ‘reasonable care’ to assess every contractor’s role. This poses a number of practical and costly challenges for the end hirer, the agency and also the PSC.

The difficulty encountered when determining status

Only this week, we have heard of the employment tribunal for Elbourn. The judge ruled he was in fact self-employed, despite the result previously given using HMRC’s Check Employment Status for Tax (CEST) tool, which had wrongly concluded that he was inside IR35 for this engagement. This was the tool the end hirer, The Met Office, had used to determine the status of the role.

This is where one of the key challenges surrounding IR35 sits; the effectiveness of HMRC Checking Employment Status Tool (CEST) and if employers can’t rely on that to determine status, then what can they rely on? Who will be deemed qualified in each company to make the decisions? And how much time and additional cost will need to be redirected in order to support the assessments of each role? Otherwise it’s a blanket decision, but then the company hasn’t taken reasonable care and so….yes, it’s a hard square to circle.

To be clear, I do not support tax avoidance, but to ensure we don’t throw the baby out with the bath water, which has been well documented from the experience of the public sector, we need more robust and competent tools, as well as more time.  

It’s only a matter of time before implementation

Despite all the failings, there is an inevitability to the roll out - so when should we prepare to welcome this moving beast? If you had asked me yesterday, I would have followed the sentiment from our recent contractor survey, which was a 50:50 split between April 2019 and April 2020. However, with the news this morning that Theresa May is considering the option of pushing Brexit back for another 12 months, it would make the roll-out of IR35 in April 2019 more appealing and avoid an uncomfortable diary clash for business in 2020.

If you would like to discuss IR35 or any other aspect of contracting in the UK, please contact me, I would be interested in your comments and questions.

Victoria Walmsley's picture
Managing Director
vwalmsley@morganmckinley.co.uk