Back in 2017 when the Government announced plans to reform IR35 legislation for the Public Sector, we guessed it wouldn’t be long until the same was applied to the Private Sector. In this blog we take a look at the new IR35 draft legislation for the Private Sector.
(18/03/2020) Please Note: IR35 Private Sector Reform has now been delayed to April 2021 due to the impact of the COVID-19 pandemic.
Over the past few years, contractors working for public sector clients have had a major shakeup, with the client, and not the contractor, determining the IR35 status. As predicted, many public sector organisations simply went for the ‘safe’ option of labelling all contractors as caught by IR35. And it’s been a ‘huge success’ for HMRC, but you can read more on our thoughts about that here…
And of course making similar private sector changes on the threshold of Brexit is an inspired idea, just when our economy will need flexible workers.
When Does The New IR35 Legislation For Private Sector Take Effect?
The legislation was announced on the 11th July, and is proposed to take effect from April 2020, you can read the full document here.
The legislation is only draft legislation at this point, so there could be amendments coming, and we expect the legislation to be finalised by the Autumn Budget due in a few months.
The legislation applies to ‘Medium’ and ‘Large’ engaging companies only. If you qualify as a ‘Small’ engaging company, there are no changes.
What Counts As ‘A Small Company’ With Regards To IR35?
The legislation states that small engaging companies will be exempt from this new IR35 legislation. This means that if your company meets the Government’s criteria for a ‘small company’, the old rules apply, and the contractor will determine the IR35 status.
A company qualifies as a ‘Small Company’ if you meet at least two of the following criteria:
- Turnover is less than or equal to £10.2 million pa
- Balance sheet total of no more than £5.1 million
- Fewer than 51 employees.
The good news for small engaging companies looking for contractors is that your contracts will be in demand, as most contractors would prefer to make their own decision on IR35.
And a note of warning for larger engaging companies, you will not simply be able to set up smaller subsidiary companies to use the ‘Small Companies’ clause as a loophole, the parent company and/or group of companies will be judged together for the small company criteria.
What Has HMRC Learned From IR35 Reform In The Public Sector
There is some good news here, although HMRC are happy with IR35 reform, they have listened to some of the contracting community’s concerns. A few measures have been set in-place to help give contractors their voice back on IR35 claims:
- Private sector engagers will have to provide a Status Determination Statement (SDS) to share their reasons/evidence for their IR35 decision. This will hopefully stop overly cautious engaging companies from blanket-labelling ‘inside IR35’
- A disagreement process is being introduced, so if the contractor does not agree with the engaging company’s decision, they will have 45 days to review the decision and either: change it, or provide the worker with confirmation of their original decision reasons for deciding that the conclusion is correct
- Engaging companies must not adopt a ‘blanket’ approach
But, of course, this is not necessarily good news if you’re hiring contractors, as you now need to become an IR35 expert. And if the contractor disagrees with an engaging company’s position, what happens then? Perhaps a real review process will be introduced, but in the meantime the contractor could technically sue your company for tax incorrectly deducted.
Industry leaders have been voicing their concerns about IR35 reform in both the public and private sector, one key area was that the contractor has very little choice in the decision, and while the above measures are a step in the right direction, they are still not good enough. There should be a formal and independent appeals process for contractors who believe they are working outside IR35 whose engaging companies say they are ‘Inside IR35’.
Another serious concern is that the HMRC tool knows as CEST, which allows an individual or company to test the IR35 status of a contractor, has been shown to be extremely unreliable*, and has not been updated for over two years.
Why Contractors Should Not Be Blanket-Labelled ‘Inside IR35’
By labelling your contractors as inside IR35 incorrectly or inaccurately, you may see the following situations which you will have to manage:
- You may lose contractors resulting in further recruitment fees and/or a gap in productivity as a result
- Your contractors, current and future, may demand a higher day rate to make contracting worth their while
- You may not be able to afford the more skilled contractors who may look elsewhere for work or turn back to the employed sector
- You may face legal action if a formal appeal procedure is not introduced
We think it’s also important for engaging companies to understand why contractors prefer to work outside IR35. You must understand that a contractor is an individual who is working for their own company. As such, they have more risk: they have a contract end date, they do not receive any company perks or pension, they must provide their own equipment, cover their travel costs, and administer their own company affairs. Essentially their status within your company is temporary. If you label them inside IR35 you’re saying that they must pay tax as if they were employed, but receive none of the working rights, benefits or security of an employed person.
Essentially your contractors are opting to work in a risky environment for the benefit of your company, which requires short term talent to achieve results. And when a contractor is caught by IR35 they are often financially better off leaving their limited company and becoming an employee elsewhere.
Did you know: NHS waiting times have increased by 50% in the last two years, partly due to pension charges and partly due to all NHS medical freelance staff being blanket-labelled as inside IR35, read more on this blog.
How Private Sector Contractors Should Prepare
Contractors should prepare by taking a look at their own IR35 status. If you don’t know much about it, take a look at our IR35 page here, and call our team to book in for an IR35 assessment.
You should take a look at your current contract and make sure there isn’t anything in there that could be deemed as inside IR35. The key things to watch out for are control over what you do, where you do it, when you do it and how you do it. Sometimes the contract you’ll sign is a mish-mashed version of the company’s standard employment contract. Educate yourself on what should be included in an outside IR35 contract, and what should not be – remember you can request amends to your working contract before you sign it – so read it well or even have it assessed by a professional.
When it comes to signing up for a new contract from April 2020, be careful to assess the working conditions, and feel free to speak openly with your prospective private sector engagers to come to a mutual agreement with them. Remember, that whilst this is new for them, it’s not new for you, they might want your input. And if the working conditions for the contract mean that you will be inside IR35 for the first time, you will need to assess what that means for your finances, and possibly negotiate a higher rate to make up the tax gap.
Did you know: Most UK banks are ending their contracts with PSCs, as assessing them all correctly before April 2020 would not be possible?
How Private Sector Engaging Companies Should Prepare
Private sector engaging companies should prepare now to ensure they are ready for April 2020, and they could also keep an eye on any changes between now and The Budget in October.
To prepare, you’re going to need to learn a little more about what IR35 is and why it is. You will need to provide evidence of your decision, which could possibly in the future have larger implications if a formal independent review process is introduced. Do not simply decide all contractors are inside IR35 without reviewing them on a case by case basis.
IR35 is tricky, though, so it would be wise to up-skill someone within your company to ensure you are fully capable of making accurate IR35 determinations. The Payroll Centre is offering IR35 training courses, which would be ideal for HR staff to attend so that they feel appropriately qualified to determine IR35 status.
If you have an employment lawyer, they should also be able to help you in your determinations and provide educational materials. If you currently don’t have an employment lawyer and you have multiple contractors working for your organisation, then perhaps consider appointing one.
How Recruitment Agencies Who Pay Contractors Should Prepare
Recruitment agencies who act as an intermediary and technically ‘engage’ contractors should follow the same preparations as the private sector engaging companies above.
In addition, we’ve been noticing the growing trend in job advertisements of declaring a role as being inside or outside IR35. Agencies should advertise a role as being inside or outside IR35 only in the public sector at present where the public sector body has determined status and advised the agency.
They may also do so for private sector contracts from April 2020. To jump the gun and advertise as inside or outside IR35 now for private sector roles means that tax advice is being given by an agency and risks invoking MSC legislation.
The team at Warr & Co have been contractor accounting experts for over 30 years. We offer full accounting packages to contractors which come with unlimited IR35 advice. We are a medium sized, friendly accountancy practice whose focus is first and foremost to offer individually tailored accounting solutions. You are never just a number on a spreadsheet to us.
If you’re not a client, but would like to learn more, we offer a free no-obligation initial consultation over the phone nationwide, or in-person at our office locations in Stockport, Manchester or London.
© 2019 Warr & Co Chartered Accountants. Warr & Co Chartered Accountants is a member of The Institute of Chartered Accountants in England & Wales (ICAEW). Whilst the information detailed here is updated regularly to ensure it remains factually correct, it does not in any way constitute specific advice and no responsibility shall be accepted for any actions taken directly as a consequence of reading it. If you would like to discuss any of the points raised and / or engage our services in providing advice specific to your personal circumstances, please feel free to contact any one of the partners on 0161 477 6789 or contact us via our website forms. Warr & Co Chartered Accountants are registered to carry our audit work in the UK, our audit registration number is C002961684, for more information please visit www.auditregister.org.uk.
What I never seem to be able to get any good commentary on is the definition of a PSC? If a company, has a contract to provide 2, 3 or more consultants to cover 2,3 or more roles, or even of the same role, and the company uses 3 different individual consultant companies to provide those services, under 3 different contracts – then would this scenario be caught by the new IR35 proposals? As the company providing the services is a small company – annual turnover say around £3-400,000, number of employees less than 50. So the company itself would not be liable to determine IR35 status, and even if it were, it would easily determine Outside IR35 and have contracts in place to support this. The ‘End Cient’ would then not have to determine status because the Company would just be treated as any other supplier?
If the above would have no IR35 implications and no determination would be required, then the solution would be for PSCs to simply group together in small umbrella-style companies such as described? OR if the above would not work (why not exactly), then what is to differentiate a slightly different scenario of say a large consultancy, such as Accenture for example providing 3 consultants to provide the same services above, from the Company (small “umbrella” described above) – why are they affected by IR35 in one scenario and not the other?
Would appreciate some thoughts on the above?
Regards,
Jon
Whilst tax legislation defines MSC (manages service company), there is no statutory definition of PSC. Perhaps the closest we can get is “a company which provides the personal services of one or more individuals to third party clients)”
It is important to appreciate the connection between PSC’s and IR35 engagements provided through limited companies. The second is a subset of the first, not the other way round.
In the circumstances described, IR35 may apply to one or more of the relationships or none of them.
Under the changes taking effect in April 2020, it is the client company which needs to decide whether IR35 applies, not the PSC. Where the client is a small company the new rules don’t apply, but the existing rules must still be considered. But the grouping idea doesn’t work because the client still needs to make a determination about the relationship unless it is a small company.
Please do feel free to reach out to us if you’d like any further information.