Client FAQ – Reforms to IR35 in the Private Sector
What is IR35?
IR35 is the more familiar term for the Intermediaries Legislation (originally introduced as part of the Finance Act in 2000). It is tax legislation brought in to combat disguised employment.
One of the major concerns regarding IR35 is how complicated it is. Some roles are very distinctly either inside or outside of the rules but boundaries can be ambiguous. It can make assessing status difficult even for those who understand the legislation well.
What is the current law surrounding IR35?
In the private sector, individual limited company contractors (PSCs) can determine their own IR35 status.
In the public sector, assignments are assessed by the end client to determine whether they are inside or outside of IR35. The feepayer, either you if you are contracting directly or the agency if they are part of the supply chain, then applies this determination and in turn, the correct payment mechanism. The feepayer remains liable if, in the event of an HMRC investigation the determination is found to be wrong.
What does it mean to be inside or outside of IR35?
In short, this indicates a contractor’s IR35 status:
Inside (the IR35 rules apply), a contractor is perceived as an employee for tax purposes so all deductions i.e. tax and National Insurance (NI) must be made at source
Compliant methods of engagement
- In-house payroll (if direct)
- Agency Paye or umbrella/payroll provider
- Deemed (Paye to an individual’s limited company)
Outside (the IR35 rules do not apply) a contractor is perceived as being a genuine contractor for tax purposes
Compliant methods of engagement
- As above and also via limited company (gross)
Indicators of ‘Employment Status’
There are roughly a dozen but the key ones are:
- Personal Service and Substitution – Providing a service personally or a limited company sending one consultant in place of another
- Mutuality of Obligation – An obligation for a client to provide work and for the worker to accept and personally carry it out
- Supervision, Direction and Control (SDC) – The control a contractor does or does not have over how they carry out their work
It is important to remember that contracts alone do not determine IR35 status. More than ever, true working practice i.e. what is actually happening on the ground must reflect the tax status that is being claimed.
When will the new legislation come into effect?
Draft legislation was released on the 11th July 2019 with final legislation expected in the Autumn. It will come into law on the 6th April 2020.
What will the changes look like?
At present, the reforms will be similar to those introduced in the public sector in April 2017. Legislation will move the responsibility from the PSC and place an obligation on the end client to assess the IR35 status of a role/assignment. It will then be the feepayer who is responsible/liable for applying that determination.
The client will need to be able to demonstrate that they have taken ‘reasonable care’ when making their determination.
What will be different to the public sector?
Draft legislation confirms:
- Small companies will be exempt, the definition of which will likely be based on the Companies Act 2006:
- Turnover < £10.2m
- Balance sheet total < £5.1m
- Employees < 50
- You, the end client will retain liability until you deliver a status determination to the party that you contract with AND the worker
- A contractor will have the right to appeal a determination and you must have a process in place to effectively manage and respond to these challenges.
- There is more emphasis than ever on the end client being able to evidence fair and correct determinations, not just ‘safe’ ones i.e. all inside of the rules.
- One of the key issues is control in respect of IR35 and determining self-employment status. Control over how a worker carries out a specific piece of work is particularly relevant; can you demonstrate that the contractor has autonomy over how they carry out your work?
What does this mean for me as a client or hiring manager?
There remains the potential to continue working with contractors engaged through their limited companies. It is thought that around a third of contractors will be affected so many roles will remain as outside of IR35 but this determination ultimately rests with you.
How do I make a determination on the IR35 status of an assignment?
HMRC has provided a Check for Employment Status for Tax (CEST) tool that end clients, agencies and contractors can use to help determine their status. Unfortunately, it has been widely criticised as ineffective for roles that are not clearly inside or outside. Encouragingly, since the initial introduction of the reforms to the public sector, there are now many other avenues for support in making determinations. They key issue is that you must take and be able to evidence that you have taken ‘Reasonable Care’ when making the determination otherwise you risk liability moving up the supply chain to you.
You will need to provide this determination (Status Determination Statement) to your supply chain.
What is ‘Reasonable Care?’
This term was introduced to reinforce the importance of not just making blanket decisions about job roles but to truly understand what it is for a role to be either inside or outside of IR35 and apply it accurately. As an end client:
- Establish a team to lead the response to these reforms and ensure they really understand the legislation and the changes
- Review your current flexible workforce
- Who’s in scope?
- How big is your exposure?
- Do you have projects straddling April 2020?
- Have you considered rate increases for business-critical roles that are likely to be called inside?
- Ensure your process is documented. If a contractor disagrees with your determination, they have the right to appeal and you must be able to evidence how you have reached your decision.
- You have 45 days to respond to a challenge by a contractor
- Don’t make blanket decisions!
- If all roles are called all one way or the other, there is unlikely to be evidence of ‘Reasonable Care’ and liability could travel up the supply chain.
- You may suffer at the hands of your competitors who do decide to put a robust process of determination in place. If a role is truly inside of IR35, then it is regardless of the client but if not, contractors may vote with their feet and seek out those clients who are more accurately assessing roles.
Do contractors have other opportunities available to them after April 2020
There is a widely held opinion that after April 2020, contractors will have nowhere else to go so will have to accept whatever determination is offered. However, feedback from the contracting marketplace suggests that many are considering:
- Permanent roles
- Contracting opportunities outside of the UK
- Statement of Work (SoW) solutions – Working as a team on an end to end project delivery
Blackfield Associates currently offers opportunities in all areas and will also shortly be engaging with a new partner to help support IR35 assessments and provide guidance moving forward. If you have any questions, would like any clarity around some of the issues outlined here or would just welcome a wider conversation, please contact Darren Day at email@example.com. We have been living and breathing IR35 for almost 20 years now. Let us help!