The following is a collaborative piece, produced with our financial partners Price Bailey.
What is IR35 in a nutshell?
IR35 was first introduced in 2000, and is designed to reduce tax avoidance by contractors who HMRC believe to be ‘disguised employees’ – people who work in a similar way to full-time employees but then bill for their services via their limited companies to make their business as tax efficient as possible. Originally, IR35 employment status was declared by the contractor and not the hiring organisation. But in 2017, the rules changed significantly for the public sector, with the onus to prove self-employed status shifting from the contractors themselves to the hirer.
April 2020 is fast approaching
Private sector IR35 reform is set for April 2020, when the public sector rules will be applied to the private sector. However, only medium and large businesses will be affected; small businesses will not need to determine the status of the off-payroll workers they engage. The government intends to use the Companies Act 2006 definition of a small company which means meeting any two of these criteria: a turnover of £10.2 million or less, having £5.1 million on the balance sheet or less, or having 50 or fewer employees.
In practical terms, for medium and large hiring organisations this means the cost of hiring contractors within the scope of the rules will increase. Hiring organisations and subcontractors alike will, therefore, need to understand how they are impacted and be ready for April. HMRC’s ‘CEST’ (Check Employment Status for Tax) tool is designed to help engagers make employment status determinations. However, there has been much debate between HMRC and practitioners around the accuracy of the output from the CEST tool. In particular, there is an acceptance that compared to the public sector, there are greater breadth and complexity of off-payroll working arrangements in the private sector. Equally, there is an acknowledgement that the individual imputing data into the CEST tool must themselves have a good understanding of the IR35 rules.
So how can hiring businesses and contractors prepare?
There are a number of questions to consider now:
For hiring organisations:
- Is the organisation in scope ie are they a medium or large business?
- What is the scale of the ‘problem’ – how many subcontractors does the organisation engage?
- Who in the organisation has a good understanding of the IR35 rules? Are the arrangements with off-payroll workers fairly straightforward? – is professional advice?
- What will be the impact going forward? Does this business need to revisit how it engages off-payroll workers in the future?
- Does the individual understand the likely application of the rules to them and their current contracts?
- Is this likely to give rise to contract disputes/project disruption in relation to their existing engagement(s)?
- Is this going to lead to recruitment challenges in the future? Can contractual terms be reevaluated?
Price Bailey is supporting organisations and individuals alike in navigating the 2020 changes. For further information, please follow the link to Price Bailey’s website (click here).
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firms.