In April 2017, the contracting world saw the introduction of ‘off-payroll’ legislation in respect of IR35 for public sector engagements.
The reform imposes a requirement on the end client i.e. the public sector body, to determine if IR35 applies. Previously, IR35 determination was made by the contractor, but the change has now taken this decision out of their hands.
Where IR35 is deemed to apply, any payments made to the contractor are treated as if they were employment income. This means that they are subject to deduction of tax and NIC's, and receive a net pay income. However, where the public sector organisation use an agency, the responsibility for undertaking the PAYE operation and making the relevant deductions moves to that agency.
The question that HMRC continue to overlook is that of education with regards to IR35 and its legislative updates. Whilst the employment status tests for determining a contractors IR35 position remain unchanged, end clients, both in the public and private sector, are able to use CEST (Check Employment Status for Tax), HMRC’s online status indicator tool. CEST assists in making the IR35 decision based on a series of questions and responses.
Public Sector reforms a success?
It will come as no surprise to hear that HMRC believe the IR35 reforms in the public sector have been a resounding success in reducing non-compliance in the working practices of contractors. They remain keen to extend the same rules to the private sector and attempt to justify this by citing an estimated non-compliance cost of £1.2 billion by 2022/23. However, there is little to no evidence to back this whopping great figure up.
So, what does the future hold? Well, many prominent IR35 commentators were expecting last year’s Autumn Budget to confirm that the IR35 public sector reforms would be cascaded over to the private sector. However, it was instead announced that the government were to consult prior to making any firm changes. This approach indicates that they appear to have learnt from mistakes made in the roll out of the public sector changes, where there was little consultation, as well as appearing keen to assure the contracting community that they will be listening to them and that their interests and concerns will be heard. The consultation itself can be expected any time soon.
A harder nut to crack?
It goes without saying that HMRC know the private sector will be a far harder nut to crack, and that it will not be as intimidated as the public sector. It is wholly feasible that end clients who suddenly become responsible for deducting PAYE and NIC's, and are also paying employers NIC's where a contract is deemed to fall within IR35, refuse to roll over and die without putting up huge resistance.
One can assume that the consultation process will not be rushed. This means that any changes to be integrated and rolled out as legislation will happen no sooner that April 2019. And with no significant announcements in the recent Spring Statement, April 2020 is now looking the more likely.
And finally… there is evidence that the public sector reform has not been the success HMRC purports. In fact, the opposite is the case, as there has been an exodus of contractors and a rise in rates. Many valuable and scarce skills and expertise are being lost to the private sector or from contracting altogether.
In such times, it is vital that the private sector sticks together and does not suffer the same fate. Contractors, agencies and accountants alike should get involved in the consultation process and present a compelling case to government. Any attempt to extend the off-payroll IR35 reform to the private sector will have an enormous economic impact.
If you do just one thing, then start educating yourself on IR35. Increase and raise awareness of what is at stake and above all else, participate in the consultation. The very fate of contracting is at stake - don’t let HMRC dictate it!