The Intermediaries Legislation, more commonly known as IR35, was introduced over 20 years ago and requires contractors working in ‘disguised employment’ positions – where their role, responsibilities and position within an organisation do not differ in substance from that of a permanent employee – to be taxed at the same rate as a permanent employee under the PAYE system.
The rules were tightened in April 2017, with ‘off payroll’ legislation introduced to pass the liability for determining a contractor’s IR35 status to the organisation engaging the contractor, and to compel them to deduct PAYE and National Insurance from contractors’ pay at source. Previously, the responsibility for determining IR35 status fell onto contractors, and led to concerns regarding widespread non-compliance.
For more information on IR35, please see our guide to IR35.
Despite widespread criticism of HMRC’s implementation of the legislation and the tools provided to assess IR35 status, it was announced that ‘off payroll’ IR35 legislation would be extended into the private sector as part of the 2018 Budget. The legislation affects all private companies except ‘small businesses’ – defined as organisations with 50 employees or less.
What exactly are the changes to IR35?
Commencing on 6th April 2020, private sector organisations which engage the services of a contractor through an Intermediary (Limited company or similar structure) – whether directly or via a recruitment agency – is responsible for determining whether the contract falls inside the scope of IR35.
Where it does, the organisation paying the Intermediary is responsible for deducting tax and National Insurance from the money paid, as well as paying Employer’s National Insurance. This brings payments into line with those paid to permanent employees.
Broadly, this shifts the burden of compliance with IR35 from individuals to organisations – intended to pass responsibility to larger organisations with a lower appetite for risk, and to facilitate easier investigation of IR35 cases by HMRC.
What are the impacts on contractors?
The most fundamental impact on contractors in the private sector is a reduction in their pay if found to be operating inside IR35. This is, of course, by design – the measures are a response to a reduction in tax revenues as an increasing proportion of the UK’s workforce moves to non-traditional working arrangements and remuneration structures.
Passing liability to the engager of the contractor means that a worker has little control over their IR35 determination. A risk-averse organisation may take a very conservative view on IR35 status for contractors to avoid the possibility of a legal challenge by HMRC – this has already been seen in parts of the public sector, notably in the healthcare industry.
This is compounded by the fact that HMRC’s own tool used to determine IR35 status, the CEST (Check Employment Status for Tax), has been widely criticised and a number of experts have found it to be severely lacking. As a result, contractors run the risk of being falsely deemed to fall inside IR35 when organisations use HMRC’s official tool as the basis for their IR35 assessments.
In a recent white paper, former HMRC inspector and Dow Schofield Watts tax partner Philip Manley summed it up as follows:
“Unless HMRC can disprove the substantial evidence demonstrating CEST’s shortcomings, then it’s clear that CEST is not fit for purpose.”
What are the impacts on businesses?
The impacts on private sector companies are varied and represent an onerous burden on engagers of contractors.
For contractors deemed inside IR35, Employer’s National Insurance will need to be paid, alongside the Apprenticeship Levy. This represents a significant additional outlay, especially for organisations which use contractor labour extensively.
Accounting for income tax and National Insurance under PAYE rules for contractor wages can also represent a significant outlay, both in terms of adaptations to existing computer systems (which can be time-consuming and difficult for large organisations) and additional in-house expertise required to properly manage the payments.
Assessing the IR35 status of contractors needs to be approached carefully – there have been several cases of legal challenges regarding IR35 determinations in the public sector, and the number is likely to increase once the legislation is extended to the private sector. Disputes with contractors can arise when organisations take a ‘role-based’ approach to IR35 classifications – that is, deeming any contractor in a specific role to be inside or outside IR35, rather than individually assessing each case. With the unreliability of HMRC’s CEST tool, it is likely that businesses will need to engage the services of IR35 experts to ensure compliance and protect themselves from legal challenges.
It’s worth noting that new contracts after April 2020 aren’t the only ones that will need to be assessed – any existing contracts which are in place at this date will also require a review to determine IR35 status.
I’m a contractor – what do I need to do?
At this point, it appears inevitable that the private sector IR35 changes will go through – despite criticism from multiple angles and concerns from industry groups, there has been no indication from HMRC or the Government that the reforms will be delayed or abandoned.
Communication and evidence are key – if you’re working on a private sector contract in advance of the 6th April 2020 deadline, it’s important to document evidence supporting your IR35 position in the event that you need to challenge a determination by your engager.
You are, of course, free to decline or negotiate any contracts which fall within IR35 – either by asking the hirer to make concessions regarding the substance of the role itself, or by requesting an uplifted rate of pay to compensate for the increased rate of tax.
If you currently operate a Limited company, it may be that the additional administration isn’t worth your time – switching to working through an Umbrella company removes IR35 status from the equation completely, since you’re paid as a permanent employee of the Umbrella company under the PAYE system. Fortunately for anybody working through the Dolan Contractor Group, If you sign up to Dolan Accountancy we’ll allow you to use Contractor Umbrella margin free for any contracts better suited to Umbrella employment.
If you have any questions about your IR35 status, the upcoming private sector changes or anything else, give us a call on 01206 591 000 or please email firstname.lastname@example.org.