Finally, after a long period of ifs, buts, maybes and the without doubt failure (or "success" according to HMRC) of IR35 reforms in the public sector, Philip Hammond announced on Monday in his Budget speech that IR35 reforms will indeed, as was expected by many, to be rolled out into the private sector.
Whilst this is bad news overall for contractors working on engagements in the private sector, one slither of hope is that said changes are not due to take effect until April 2020, and then only to contracts where the end client is a “medium or large business”, and make of that definition what you will...
The Chancellor further confirmed in his speech that the planned reforms to be rolled out to the private sector will mirror the public sector – which itself underwent reform in April 2017. The basic logic of having one set of rules rather than two running side by side is sound. But that’s about as good as it gets. Rolling out what is widely known to be a poor set of rules to a wider group begs a lot of questions. This is especially so when it is founded on impartial and incorrect evidence from HMRC. Also, in rolling out the rules, it is clear that the Chancellor has ignored the plethora of professional and marketplace advice i.e. those who fully understand and have experience of how it all works - which was almost entirely against the chosen move.
Now, given those people stand to lose out, this could be argued in itself to be impartial, and it probably is. But once again, that said, the sheer weight of relevant commentary warning against such a move cannot be ignored. Yet sadly in most cases it has been disputed, yet it ignored. HMRC has suffered numerous recent loses in both tax and employment tribunals. Judges picked to pieces HMRC’s arguments would make most think again, but not them. For if they were to make an about turn they would open up a raft of back claims and handing over of money that is likely rightfully owed to contractors across a range of issues – doing this would not only be costly, but highly embarrassing, and here is where HMRC finds itself backed into a corner.
But it is worth asking what actually started all this? It doesn’t take a genius to know that the obvious answer is a think tank advising the Chancellor of easy pickings to balance the books, and so here is where the misguided assumptions on IR35 status and paying the same tax as an employee start – it’s not guided on factual evidence, but the need for monetary revenue.
Is My End Client A Small Business?
Moving on to April 2020, what can we expect? Well, providing the ongoing and now soon to be ramped up lobbying doesn’t get everything reversed or stayed, the Chancellor stated that private sector IR35 changes will be applicable to all businesses except “the smallest 1.5m”. But I thought you said it was only applicable to engagements with “medium or large business”? Well, here’s the first discrepancy and a prime example of how badly thought through the whole fiasco is. As always, the devil is in the detail, and we must not be left guessing as to what makes a “a small business”. The Companies Act 2006 provides some semblance of an answer:
Companies Act 2006, c.46, Part 15,
(3) The qualifying conditions are met by a company in a year in which it satisfies two or more of the following requirements—
1) Turnover (not more than £10.2m)
2) Balance Sheet Total (not more than £5.1m)
3) Number of Employees (not more than 50s)”
To make approximately 1.5 million small businesses exempt from IR35 changes the planned private sector reform leaves room for abuse and uncertainty throughout the supply chain. What if a business suddenly becomes the 1,500,001 smallest - does it change everything? HMRC at its very best.
Everyone knows that the public sector changes caused wide spread panic. This in addition to unrest and a massively risk adverse approach from those businesses making IR35 status determinations. Those making such determinations had little to no training on such a matter. Therefore they were almost randomly deciding on someone’s take home pay. In the build-up to April 2020 there will no doubt be a repeat of this. But IR35 specialists such as ourselves are they to help educate and assist with IR35. We can assist in determining the IR35 status for a contractor via contract reviews, working arrangement reviews, bespoke training and consultancy.
Without playing a guessing game, evidence would suggest that blanket assessments are likely to become commonplace. They will be done so without a genuine review of a contractors written contract, and more importantly their working arrangements. How this can be the basis for change we scratch our heads at. Not only that, we firmly believe that the changes announced in the recent budget will not increase IR35 compliance in the private sector. Certainly not to anywhere even close to what HMRC purport. Whilst compliance can always improve, and is without doubt a good thing. However, it needs to be done fairly and proportionally, and without using Triggers brush to paint a Picasso.
Every contractor has their own working practices - which lets remember are different to the terms of the written contract. It is this that HMRC know great reliance is placed upon to prove IR35 status. Risk adverse, blanket inside IR35 decisions cannot be allowed to be made. Each determination must be made on its own facts and merits. The public sector is its own judge, jury and executioner, but the private sector will be wholly different animal to deal with and let’s hope medium and large business take heed of the above.
However, somewhere along the line it’s likely that somebody will find a method of avoiding the reform. They'll likely promise contractors 85% plus take-home pay. As always if it sounds too good to be true, it will be. Remember, whilst the short-term gain is great, the long-term won’t be so rosy. We encourage contractors to stay away from anything of this nature - HMRC have form in aggressively taking retrospective action on anything they consider illegal. HMRC have a dangerous and short-sighted ignorance to the detrimental side effects their legislative reform is having. Instead they focus solely on the tax yield they are sat in a corner counting.
CEST Glorious CEST
In terms of what HMRC are doing to prepare, well they have confirmed that they will continue to work with organisations to improve their Check Employment Status Test tool (CEST). Sounds great, but for a system that is acknowledged to omit MOO (Mutuality Of Obligation) because it “is deemed present in every contract” (a point HMRC have constantly been beaten on in tribunals) it is a system that cannot be relied on. Experts raise serious doubts over the technology’s accuracy and legitimacy it is placing contractors inside of IR35. This makes taking obtaining an alternate view on your IR35 status imperative.
The conclusion – don’t wait. Educate and up-skill on IR35 and understand your or your client’s position. Understand who and where the financial liabilities rest for an incorrect determination. And finally, make sure this is known from top to bottom in the supply chain.