What is IR35?
The off-payroll working rules (known as IR35) were introduced in 2000. The rules are intended to prevent individuals from reducing income tax and National Insurance Contribution (‘NIC’) liabilities, through what HMRC considers to be “disguised employment”, where an individual provides their services via a personal service company, receiving payment in the form of dividends. The government estimate the cost of non-compliance in the private sector is growing and will reach 1.2bn a year by 2022/23. The roll out of IR35 is designed to increase compliance with the existing rules – not introduce a new tax
The off-payroll working rules can apply if a worker provides their services through an intermediary. (An intermediary will usually be the worker’s own ltd company. They could also be a partnership, a managed service company, or an individual.)
IR35 already applies to all public sector clients, but from 6 April 2020 medium and large-sized private sector clients also need to apply them.
Why should I care?
The role out had a significant impact on the public sector. A CIPD study following the implementation of the IR35 tax rules for contractors stated half (51%) of public sector hiring managers said they had lost skilled contractors as a direct result of the changes; and 71% said they were now struggling to hold on to their contractors.
The study also found that 40% of independent contractors working in the public sector said they had witnessed project delays and 35% said they had seen costs rise since the changes were introduced. Eight in ten (80%) hiring managers said they had seen a substantial increase in the workload involved in engaging and paying contractors.
Whilst the full details are still being finalised and Brexit potentially adding further delay to the role out. If you are in a medium – large sized business and are hiring contractor’s not currently on PAYE, you cant afford to ignore this.
Will it affect me?
From April 2020, the responsibility for setting IR35 status will be passed from contractors to the medium and large private sector companies that engage these workers. The liability will also be handed from the worker to the fee payer – often the recruitment agency. (This is already the case in the public sector, after the rules were changed in 2017)
HMRC are intending to update their CEST tool
to make it easier to check whether or not the work carried out by the contractor will be inside or outside of IR35. IR35 status will continue to be determined using the same tests e.g. substitution, supervision, direction and control, mutuality of obligation etc. However, the definitions are under review and there will not be a one size fits all solution.
What should I do next?
Firstly, be very aware of anyone trying to sell you a ‘solution to IR35’ because there isn’t one! The government released their draft finance bill
In July, which was open for consultation earlier this year. Firstly, it’s a good idea to read the information on the HMRC site, the full draft legislation is here
and the policy paper is here
Until the actual publication of the finance bill In March, it’s very difficult to make firm decisions. However, start talking to your consultants, clients and agencies now, although they may not have the answers, its helpful to get an understanding of the process they are going through.
If you a smaller business that currently employs contractors, you maybe ok to continue as you are, but it’s worth checking the HMRC definitions for ‘smaller business’!
Speak to your legal advisors, IR35 isn't new to market and there are choices you can make now to get ahead of the implementation in April.
What about blueskies?
From the research we have completed so far, it looks like as a recruitment agency that pays contractors who complete work for medium to large businesses in the UK, we will be directly impacted by the role out of IR35. It will be our responsibility along with the client to decide whether the work for each contract is within IR35 and ensure that the necessary arrangements are made before the work is started.
We are getting advice from our legal and accounting teams and aim to put together a plan by the end of November. However, we will not be making any final changes until we have confirmation from HMRC, this is expected in the spring statement on the 13th March 2019.
If you have any questions please do not hesitate to contact your consultant
, we may not have all the answers, but we are committed to work with you to enable solutions to any concerns caused by this process.