Are your clients ready for the changes to IR35?
HMRC recently updated its internal manual to include roughly 70 questions on employment status; it published a factsheet on off-payroll working in the construction sector; published two draft statutory instruments; and a group of industry leaders in the recruitment sector wrote to the Chancellor calling for the introduction of the new rules to be delayed by a year.
As we get closer to 6 April 2020, the clamour for a change will only increase as contractors seek to apply pressure on the government to back down. And with good reason.
Recently, Lloyds announced it would follow HSBC and others in the financial services sector in banning limited company (personal service company) contractors. Similarly, in the tech sector, IBM notified its limited company contractors that they must switch to PAYE terms or use an umbrella company from the end of March. Life sciences giant GlaxoSmithKline have announced a similar ban on limited company contractors.
IR35, also known as the off-payroll working rules, is a piece of tax legislation introduced in April 2000 designed to combat tax avoidance by individuals and hirers who engage an individual to provide their services via an intermediary such as a limited company, partnership or an agent.
The effect of IR35 is that if an individual is not a genuine contractor, freelancer, interim or consultant who is in business on his/her own account, s/he will be deemed to be an employee and subject to pay the PAYE tax and national insurance contributions paid by ordinary employees.
Often contractors are doing pretty much the same jobs as employees but reaping the tax benefit of being self employed.
HM Revenue & Customs has found it hard to enforce IR35 given the sheer number of contractors. For years, it has been losing out on tax and national insurance contributions but is now taking measures to stem the flow and it appears from the reaction of some of the largest employers in the UK that the government’s proposed changes will have and are having the effect HMRC want.
So, what is changing?
From 6 April 2020, the responsibility for determining whether an individual is genuinely self employed will move away from a declaration by the individual to being the responsibility of the end user of the services and the fee payer.
What does this mean in practice?
What this means is that if your client is a large or medium sized business in the private sector who hires a contractor directly, or through an agency, they will be responsible for getting the assessment of the individual’s employed or self-employed status right.
End users have to issue a status determination statement (SDS) to each individual contractor confirming their view of the individual’s status and why.
If your client uses an agency, your client needs to provide the agency with the correct information and pass on the SDS. If you are an agency you need to ensure that you have got the right information from the end user.
Potential negative impact
This not only adds to the administrative burden of using contractors but passes the risk to the hirer to get it right. If your client gets it wrong, they may face a fine, a tax bill and potential damage to their reputation. Go too far the other way, in an attempt to mitigate those risks, and they may not be able to attract the talent their business needs.
When similar changes were made to the use of contractors in the public sector in 2017, the use of contractors fell off a cliff and, as highlighted above, we are witnessing a similar pattern with large private sector employers.
The impact of these changes in the private sector will be significant but a blanket ban may not be the right answer for your client’s business, particularly if they want to retain and attract the most talented individuals.
Do the changes apply to all businesses?
No. And this is really important. It helps put the changes in perspective for many of your clients and should be one of the first points you make to them when questioned about IR35.
Small companies (as defined in s.382 Companies Act 2006) and businesses with a turnover of less than £10.2 million are exempt from the new legislation and the existing rules will continue to apply. So many SMEs will escape this change in the law and may feel that they can continue on as before.
However, if your client is a fast growing business or is looking for a sale/exit, how it uses contractors will be a concern for a potential purchaser. So your clients need to think carefully about IR35 and take action now to seek legal and tax advice.
A softening of the government’s approach?
At the start of the year, the government announced a review of the proposed IR35 changes. However, at present, the 6 April 2020 deadline remains.
That said, the government recently clarified that organisations contracting with third-party recruiters will receive some protection from tax liabilities, but not if the recruiter goes under or there is no prospect of recovering the outstanding tax liabilities from it. So, if a contractor was incorrectly categorised as falling outside of the scope of the off-payroll rules, HMRC will first seek to recover any unpaid tax and national insurance contributions from the agency.
While this does give some comfort, your clients’ HR teams will still need to do proper due diligence on their contractor supply chain ensuring that they use reputable and accredited recruitment firms that are complaint with the new rules.
So, what should your clients do?
The impact of these changes on different industries should be considered now to determine how each industry should prepare for the implementation of IR35. HMRC has released guidance, by way of fact sheets, on the upcoming changes.
It is advisable for businesses to:
- Conduct an audit of all the contractors they use and how they use them.
- Review the contracts their contractors are engaged upon. Are the contracts consistent and fit for purpose?
- Review the guidelines, if any, their business has for engaging contractors to ensure a uniform approach that is compliant with the new rules and helps reduce the risk of contractors being deemed to be employees by HMRC.
- Ensure their systems are able to adequately record the status of each individual, why and keep the information up to date.
- Start budget planning for the increase in administration costs and the cost of potentially moving key individuals and others on to the payroll.
Over the past 18 months, there has been an increase in cases HMRC has taken to the Tax Tribunal and that is unlikely to change as it seeks to recover lost revenue and apply pressure to businesses across the country to help it crack down on off-payroll workers. This is tricky area and it is important to get it right.
Neil Johnston, partner and head of employment team at Bolt Burdon