IR35 has been a long time coming. Having been first conceived back in 2000 and edited multiple times since then, it was finally reformed and rolled out to the public sector in April 2017.
The application of IR35 in the public sector has been subject to wide scrutiny, with national corporations like the BBC and NHS now facing the consequences of blanket employment status determinations. There have also been extensive investigations carried out into whether these corporations did enough to warn their contractors about the risks of PSCs. It would appear they did not, resulting in a fiscal migraine for everyone involved.
It seems that more harm than good has come of IR35 in the public sector, which is understandably unnerving for private sector contractors and clients. With the April 2020 deadline looming and nothing but bad news heralding the advent of IR35, what can private contractors expect?
Andy Vessey ATT, Head of Tax here at Larsen Howie, comments.
Will the private sector see the same upheaval of contractors?
Whilst the public sector is worth mentioning, I’m not so sure that there will be the same knee jerk reaction within the private sector.
HMRC claims that compliance has increased within the public sector since the introduction of the ‘off-payroll’ rules, but then they would do wouldn’t they? Furthermore, I believe that some of the increased revenue that HMRC claims to have raised has been due to public sector bodies running scared. Some have taken a very risk-averse approach when assessing their contractors’ status, to the detriment of said contractors. No doubt there will be some engagers within the private sector who adopt the same attitude.
Many private sector hirers will decide that it’s all more trouble than it’s worth and therefore only offer roles on an ‘inside IR35’ basis. However, they risk having to pay contractors more as there is likely to be a demand for fee increases in the region of 30% to compensate for the loss of net earnings due to suffering PAYE tax & employees NIC deductions. If the end client is not willing to negotiate on fees, then they risk compromising themselves as they may not be able to attract the best possible expertise that is required.
Can clients and contractors help each other?
The run-up to April 2020 is an opportunity for engagers to consider how they can legitimately help contractors preserve their self-employed status, particularly where their employment status is ambiguous. There may well be situations where this is impossible but these can be identified and ruled out, enabling the engager to concentrate on the remainder. It is in the end client’s own interests to help keep contractors outside of IR35 – and, I stress again, legitimately - if they want to save themselves 13.8% employers’ NIC.
End users will be reluctant to offer permanent positions because contractors are usually engaged for interim periods and/or for specific projects, and taking them on as employees means they will also have to provide them with all the associated employment rights, thereby further driving up costs.
Are there any legitimate ways around IR35?
Umbrella companies may be a preferred option for some engagers so as to relieve them of the hassle of having to consider the ‘off-payroll’ rules but again they may be compromising the pool of talent they wish to draw on. Another option would be to use contracted-out service providers but this requires end clients fully contracting out services to a third party, i.e. specific projects ran and managed by a third party. In these cases, the ‘off-payroll’ rules do not apply.
Agencies need to be working with their clients to help them assess the inherent tax risk and put in place processes that will produce robust employment status determinations, unlike the shambles we’ve seen so far from HMRC’s CEST tool. Such status assessments should ideally be undertaken in conjunction with the contractor, as there may be some factors that may affect that assessment that only the contractor has knowledge of, i.e. that they’re in business on their own account. This approach will also help reduce the length of time of any challenge by the worker to a status determination and allow for a dialogue to bring swifter resolution.
Finally, it is worth remembering that the April 2020 reforms will only affect medium and large-sized businesses and those contractors working for ‘small’ companies will be unaffected by the changes.
How can you protect yourself against IR35 in the private sector?
Should you be concerned about your own IR35 status, we offer a full contract review amongst other services to help you prepare for April 2020. We’ll give an explicit pass or fail based on the current contract you hold, along with comprehensive comments on how to improve any problem areas.
We also offer IR35 tax investigation insurance (TILI) which protects against the court costs that could arise from an HRMC case. It also covers representation by a tax specialist at a tribunal.
For any further information or advice, please call us on 01163 800 400 or email us.