There has been a lot of noise surrounding proposed changes to IR35 that you will have heard about by now. The real questions now are; what do we know and what can we do to plan for April 2020 to ensure we mitigate risks and prevent disruption to business operations and projects? We’ve put together a past, present, and future analysis to make sure you are fully prepared for the reform. If you’d like to know more at the end of this, please come to our free round tables and events happening over the next few months, further details below.
Past: Public Sector IR35, 2017
In April 2017, the public sector saw major changes to the legislation. The responsibility for determining the applicability of IR35 transitioned from the contractor, to the client, with the agency (fee payer) taking responsibility of the reduction of tax from payments to the PSC where IR35 applied. The contractor no longer had any responsibility in dictating how much tax they had to pay.
Present: Private Sector IR35 by 2021
As of April 2021 (initially Apilr 2020), the Chancellor has announced that the private sector will become more aligned to the public sector regarding IR35. The main differences for private sector businesses will be:
- If a fee payer doesn’t pay the tax, liability will be passed up the chain
- Mandatory provision of information to the contractor stipulating how decisions are reached
- Mandatory requirement of client to give the contractor the right to appeal a decision
Current rules stipulate that where a service is provided to an end user through an intermediary (such as their own limited company), it is the intermediary that determines the individual’s employment status, and therefore the applicability of IR35. However, this reform means that it will become the medium and large corporate end users who become responsible for ruling on employment status and correctly operating PAYE and NIC.
HMRC have announced that this reform will focus on ensuring businesses comply in the future, rather than focusing on retrospective cases and they will not be executing targeted campaigns into previous years. Rather, they have advised that the ‘CEST’ tool will be updated for private sector use, so IR35 status can be checked, and have provided guidance on carrying out company-wide assessments to identify where IR35 will apply. However, the ‘CEST’ tool itself is flawed and doesn’t always come back with a definitive answer, meaning that further investigation and assessment is still required.
Significantly, they have warned against using role-based blanket assessments. These blanket assessments do not constitute ‘reasonable care’, insurance underwriters won’t cover the tax risk based on this, and HMRC can extend inquiries into businesses if not provided with adequately detailed, individual assessments. Reasonable care constitutes seeking independent legal advice and assessing employment status on an individual basis.
At a recent event, we were given information sourced from Ernst and Young and HMRC, which suggested that only 1/3 workers were likely to be affected by IR35, but this hasn't stopped risk-adverse decision-making by large companies, most recently with Tesco Bank and Barclays making the decision to go PAYE. IR35 is also most likely to affect labout intensive roles across white collar positions, rather than project based work such as software development and engineering roles (albeit not all encompassing). Despite strong advice against making blanket assessments, Tesco Bank, HMRC, and Barclays have already confirmed that they will no longer hire contractors. IR35 expert, Seb Maley, has described some of this behaviour as non-compliant and unnecessary approach to reform which will result in "huge skill gaps for Tesco Bank as contractors, with no choice but to work inside IR35 without a rate rise, will walk away."
Other large businesses making these decisions so far have been Lloyds, HSBC, and GlaxoSmithKline who have pledged to cease engagement with PSC's in order to avoid risk.
Supply Chains
Supply chains also need to start preparing as soon as possible for the change. After identifying the contractor workforce, it is key that the IR35 status of each part is carefully assessed, and strategic decisions made about which parts need to work differently moving forwards.
How is IR35 Determined?
IR35 argues that if a contractor is working as an employee, they should be taxed as an employee, stating that there should be considerable differences between how contractors and employees work or IR35 may apply.
Small Business Exemption
Small businesses will continue to comply with ‘old’ IR35 and will be exempt from the reforms. Ministers have also concluded that small end users do not need to prove their small status, and that the supply chain should assume that they are exempt due to size unless a determination is supplied. Small companies are classed as businesses with less than £10.2M turnover, less than £5.1M balance sheet, and less than 50 employees, as stipulated in Company Act 2006.
Risk to Hirers
IR35 reform imposes some increased risks to hirers who will now have to be cautious of:
- Criminal Finance Act: hirers become liable for the actions of off-payroll workers regarding tax evasion, potentially resulting in financial penalties and criminal convictions.
- Intermediaries Legislation: hirers are responsible in ensuring supply chain compliance. Failure to do so can result in fines, penalties, and criminal convictions.
- Transfer of Debt: hirers dealing with sole traders and unincorporated businesses are responsible for determining tax status. Inaccuracy can result in transfer of debt and PAYE liabilities.
- Managed Service Company Legislation: transfer of debt rules applies to hirers who use MSCs.
- Agency Workers Regulation: requirement of understanding contractor rights (reputational risk).
But contrary to initial belief, this is not a reason to avoid hiring contractors.
Future: How to Use Maxwell Bond During this time, businesses should refrain from making rash decisions that could be detrimental to their businesses and most of all must not refrain from engaging with contractors for business-critical projects. They can offset the risks imposed by the reform of IR35 by using a recruitment consultancy like Maxwell Bond who are fully prepared for IR35 implementation, have combined with the best in class, strategic partners to help offer advice, support and guidance through the reform. Fundamentally, if you use Maxwell Bond’s advice, we will take full accountability, indemnity, liability and insurance on and help businesses eliminate risk and exposure to IR35.
In advance of 2020, Maxwell Bond are identifying where IR35 will apply and are implementing a robust process which will determine if IR35 is applicable to future engagements. The team are also building a communications strategy to ensure accurate and useful information is clearly distributed to clients and candidates, to ensure full preparedness ahead of the change.
