Are you up to date with the latest news and developments about IR35? For contractors and freelancers, staying informed about IR35 is an absolute must. Here are the latest developments up to March 2019.
When did IR35 come into effect?
The history of IR35 is lengthy and detailed (which you can read here) but we’ve summarised it in a brief timeline in the spirit of convenience:
2000: IR35 legislation first became law via the Finance Act 2000, and has made it illegal to use a self-employed status to avoid income tax and National Insurance contributions (NICs).
2001-2010: Even though the legislation has been revised twice since it was first enacted, IR35 is still widely unpopular. It’s heavily criticised by the press, MPs and contractors alike, and while efforts to derail the legislation have been made, critics have either failed or been outright ignored. To this day, dedicated organisations continue to campaign against IR35.
2011-2014: When the Tory/Lib-Dem Coalition Government assumed office in May 2010, one of George Osborne’s first projects was the Office of Tax Simplification (OTS). The OTS founded the ‘Business Entity Tests’ in an effort to improve the general opinion of IR35, but after three years of heavy criticism, these ‘BETs’ were abolished.
2015-present: From April 2016, IR35 applied in the public sector. The CEST tool was launched in 2017 (again, to much criticism), and it was also announced that off-payroll rules would extend to the private sector from April 2020.
Why does IR35 still cause issues?
Despite the prolonged criticism, many in the industry are still frustrated about how unclear IR35 is.
The main gripe is that IR35 doesn’t have clear rules defining whether a freelancer or contractor is working inside or outside of IR35, or how to prove and evidence if this is challenged. This makes it difficult for contractors to protect themselves if investigated by HMRC.
The mountain of public complaints continues to build. Many feel only legislative and case precedent guides IR35 forward, making investigation results hard to predict. HMRC investigations are also notoriously drawn-out, meaning substantial amounts of regular income could be lost.
What are the main criticisms of IR35?
The main criticisms of IR35 are still relevant today. These include:
- There are two sets of rules (public-sector and private-sector);
- It’s too complex;
- The reason why it was designed and enacted no longer exists;
- Many tax planning schemes have emerged, causing more losses to HMRC;
- Those outside IR35 pay less, as they pay Employers NICs as well as Employees NICs;
- It punishes everyone under the same legislation, though many operate without intending to avoid tax;
- Contractors are denied the same legal, state, and other benefits that employees are entitled to;
- Little of the money it claimed it would raise has been collected;
- Larger companies benefit, while smaller businesses are made vulnerable;
- Companies are encouraged to move offshore rather than source from the UK;
- And the ‘deemed payment’ calculation is overly complex.
Has IR35 improved since?
Despite the abolition of BETs, IR35 was still labelled too important to scrap, so further improvements were made instead.
Legislation changes have been slow, though. To date, only a few developments have been made compared with what was planned.
Plus, the often aggressive investigative approach that HMRC takes means the consequences of IR35 are harder to predict. Investigation protocol tends to change on a case-by-case basis. However, this means that HMRC has suffered embarrassing defeats in various cases, too.
Unfortunately, IR35 isn’t about to go away any time soon. As seen with the 2017 'off-payroll' rules applied to those working in the public sector, the modern day contractor needs to keep an eye out for legislative updates to make sure they remain compliant in the face of constantly shifting goal posts.
Which industries are HMRC most likely to investigate?
If you’re embarking on a contract with the public sector, there are some key differences to be aware of.
The public sector broadly encompasses any government body, such as local councils, the NHS, Ministry of Defence, the BBC, higher education institutes, fire services, and many, many others.
As of April 2017, contractors are no longer required to effectively identify themselves as operating inside or outside of IR35. The burden to prove this has now shifted from the contractor themselves to the public sector engager or sourcing agency – essentially, the client.
Public bodies now decide if they are engaging someone who is legitimately self-employed, or whether instead, that person should be subject to PAYE and National Insurance, like any other employee. Those bodies are also fined a relatively large amount if they get the determination wrong, which has lead to blanket determinations, particularly in the NHS.
From April 2020, these public sector changes are due to be rolled out across the private sector too. Therefore contractors in the following industries should seriously consider an IR35 contract review, to prepare for a potential investigation:
- IT and Technology
- Banking and Finance
- Energy Sector
- Business and Management
- Media and Creative
Even if your particular industry isn’t included in the list above, contractors should always check their contract, regardless. After IR35 hits the private sector, your client will decide your employment status so your contract must be as clear as possible when addressing CEST tests.