IR35 was introduced nearly 20 years ago, ostensibly to root out “disguised employees”, where a contractor acts as an employee in all but name, but via an intermediary (usually a Personal Service Company). This results in off-payroll workers profiting from the tax benefits of working via their own limited companies.
Following changes to the rules for the Public Sector in 2017 the rules are also changing from April 2020, for the Private Sector. From April 2020 medium and large businesses will be responsible for determining whether contractors who provide personal services to them as end users are “inside” or “outside” of IR35. They will also have to ensure that the PAYE tax and National Insurance Contributions (NIC) are deducted ‘up front’. Previously this responsibility lay with the contractor providing the service.
It is true that the current Chancellor Rishi Sunak has announced, under some pressure, that the new rules will be enforced lightly for the first year. It is up to HMRC what this means in practice but the changes are still coming and businesses need to prepare.
Those companies rising to the challenge and being proactive are finding that the effort can ultimately pay off, and give them certainty as well as a potential competitive advantage. Others are struggling and may still be scrambling to understand the implications of this change to the legislation, or else have introduced blanket measures instead of the correct detailed solutions.
For contractors deemed to be ‘inside’ IR35, i.e. working as an employee in all but name, the fee-payer (possibly the end client or intermediary) must deduct tax and NIC. This will result in a number of procedural changes and potential ‘shifting’ of liability in the supply chain.
Managed properly, the change actually presents a wealth of opportunity for businesses to re-evaluate their current workforce and project delivery operating models and ensure that they really are delivering the best possible value for money. Businesses should question whether they are really operating with the optimum model in place, both for the present and the future. Or would the company benefit from bringing some of those roles on-payroll, or engaging a third party to deliver a true service, which is based on outcomes and deliverable? Now is the ideal time to make that judgement and act accordingly.
Despite the potential additional costs to business, there still seems to be a strong market for flexible, client managed, contract resources. There may be little appetite for more permanent staff and it is unfair to force companies to add to their full-time workforce if the actual workload demand isn’t consistent.
The fact is, the new IR35 rules will mean contractors must demonstrate, if they haven’t already, how they take some financial and operational risk. This will undoubtedly deter those not operating as legitimate PSCs. However the new rules should encourage those skilled, legitimate contractors who bring value for money for the people that engage them.
For many the starting point will be to undertake a detailed review of their contracted workforce, to determine where each member sits according to the ‘current’ employed v self-employed rules. They can do this by using HMRC’s online Check Employment Status Tool (CEST), designed to provide an accurate determination for an individual’s employment status. The tool will provide them with one of three outcomes for each member of their contracted workforce; employed, self-employed or undetermined.
If the assessment is one of self-employment there will be no change to the status quo, so no further action is required. Where the assessment is that workers are “inside” IR35, companies will need to consider moving these workers to an ‘on-payroll’ model, using their existing payroll or their provider’s payroll. However, the CEST still has some way to go in order to yield accurate results in most cases. It is not just about the written contract, but more the ways of working and the risk contractors undertake.
The CEST tool will ask about substitution, risk and equipment, as well as control and supervision in relation to taking direction or being told how to perform a particular task. In the modern business world of collaborative team working, this needs to be considered proportionately. Added to this, the fact is that we’re not seeing enough contractors or businesses who are prepared for – or even know about – the upcoming changes. This can be partially attributed to a lack of information being circulated on the subject until recently.
There is no “one size fits all” approach. Therefore, the solution should be completely bespoke and based on the situation and requirements of the company in question.
There is no doubt that IR35 has the potential to cause huge disruption if businesses and contractors fail to manage it adequately. However, the amendments to IR35 are not only workable, they are actually becoming the new “norm.” Put simply, there is no excuse why companies following them – and the contractors they engage – should not thrive, provided they properly prepare for the new reality.
Nigel Morris, Employment Tax Director at MHA MacIntyre Hudson