Earlier this week, HMRC published a 2-page PDF factsheet for contractors titled Changes to off-payroll working rules (IR35). The promotion of said factsheet by the taxman has been characteristically lacking, and the information itself is vague and impractical.
This has ruffled some feathers in the industry, particularly coming off the back of Chancellor Sajid Javid’s somewhat disappointing announcement to review the ‘implementation’ of the IR35 reform. Speaking to Contractor UK, Kate Cottrell of Bauer & Cottrell said:
“If it wasn’t for us advisers and press picking it up, would this ‘factsheet for contractors’ even be known to any PSC, let alone read by any contractor? Even more outrageous is that not only is it absent from HMRC’s site, but it’s also been issued now - just a few weeks shy of the review [ending, and] a few months shy of reform.”
We've compiled some more detailed guidance on the same topic to offer better, more practical advice for those that need it.
What does HMRC’s latest IR35 factsheet include?
The factsheet sets out guidelines for the following:
- Who’s affected by the IR35 reform?
- What’s changing when the IR35 reform comes into effect?
- How contractors might be affected by the IR35 reform
- What contractors need to do to prepare for the IR35 reform
- Other important information and your rights as a contractor
While this may seem like a fairly comprehensive list, the information given is not particularly detailed. Read on to fill in the blanks.
Who’s affected by the IR35 reform?
As the HMRC factsheet states, you could be affected by the IR35 reform if you’re engaged by a medium-large company and provide your services through an intermediary like a limited company, which is often referred to as a ‘Personal Service Company’ or PSC. The taxman classes a company as medium-large if it has a ‘turnover of more than £10.2m, a balance sheet total of £5.1m, or more than 50 employees’.
In reality, HMRC has pledged to pursue just 250 off-payroll cases a year, making it seem unlikely that you’ll be hit by an IR35 investigation. However, rife blanket employment status determinations across both the public and private sectors as a direct (albeit rash) reaction to the legislation have impacted the contracting community as a whole. It’s because of this that contractors, recruiters, and end clients alike should be as proactive as possible on the leadup to April 6th, which is when the reform is due to be rolled out.
What’s changing when the IR35 reform comes into effect?
HRMC’s factsheet keeps it vague when it comes to how the existing IR35 legislation is changing post-reform. It says:
‘From 6 April 2020, medium and large-sized organisations outside the public sector will be responsible for deciding the employment status of contractors for tax purposes. Currently, contractors themselves are responsible for making this decision in these sectors. This ensures consistency with the public sector, where these arrangements have been in place since April 2017.’
Again, while this is technically true, there’s a little more to it than that. As well as a shift in employment status determination responsibility, the following will also be coming into effect:
5% expenses allowance
As was the case in the public sector, the 5% expenses allowance - which HMRC offers to contractors operating inside IR35 - will be removed. This allowance was initially introduced to cover administrative expenses when calculating the ‘deemed payment.’ However, given this will become the responsibility of the fee-payer, as it is in the public sector, the government has scrapped it
Introduction of a Status Determination Statement (SDS)
When making IR35 decisions, private sector companies will be required to share their reasons for a particular determination with contractors and recruitment agencies. HMRC calls this a ‘Status Determination Statement’ and will introduce it with the aim of increasing transparency with regards to assessments. Until the client shares this with the contractor and the fee-payer, they will carry the liability and therefore the risk.
Introduction of client-led disagreement process
HMRC plans to include a ‘client-led disagreement process’, to give contractors the chance to challenge what they believe to be inaccurate status decisions. Part of this development includes the need for end clients to respond to this dispute within 45 days. Should they fail to do this and explain why they made a particular IR35 decision, they will become the fee-payer and therefore liable.
How contractors should prepare for new IR35 rules
We’ll skip over the ‘How the changes may affect you’ segment (that’s one of the more thorough sections of the factsheet) and instead jump straight to the dubious ‘What you need to do before April’ header. Here, HMRC advises that contractors ‘do not need to take action before April’. This is objectively unsound guidance – the sooner you start to prepare for the IR35 reform, the better.
There are a number of ways you can prepare for the reform no matter where you sit on the supply chain to make sure you’re ready for the changes. Contract and working practices reviews are the first port of call while educating yourself about what the off-payroll rules mean for you is crucial to staying on the right side of the legislation.
However, the most important thing to remember when preparing for IR35 is that collaboration is key. Maintain good communication during the whole process and encourage openness throughout the supply chain to minimise the potential for any nasty surprises.
How can Larsen Howie help you get ready for the reform?
Larsen Howie offers a range of contract and working practices reviews – you can find out which option would be best for you here. We also offer IR35 investigation insurance with representation from Andy Vessey ATT, should it go to tribunal.
For any further information or advice, please call us on 01163 800 400 or drop us an email. Alternatively, take a look around our Knowledge Hub for more IR35 advice, industry news and contractor guides.