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Posted 11th January 2019

Counting down to IR35 reforms

As we start the New Year, many businesses have laid out detailed plans for how their company will progress over the coming 12 months. However, for many businesses engaging with PSCs, a 12-month plan will not suffice, with reforms to IR35 for the private sector set to be introduced in just 15 short months.

IR35 reforms

Introduced in 2000 by the Inland Revenue (now known as HMRC), IR35 aimed to tackle ‘false self-employment’ by PSCs who were operating in the same way as a permanent employee, and therefore should be liable to pay the relevant tax and NI. Typically, identifying the status of a PSC under IR35 came as a result of three tests of employment, mutuality of obligation, control and substitution, all of which pinpointed the precise nature in which they worked alongside an end client.

IR35 legislation was further developed in April 2017, when reforms for the public sector came into force, which saw the responsibility for determining IR35 status move from the contractor themselves to the engaging company, be it end client or recruitment agency, thereby also transferring liability for incorrect taxation.

From the outset these IR35 reforms were fraught with issues from all sides. Recruiters and businesses engaging with PSCs struggled to keep up with the demands of assessing and assigning the correct IR35 status, which led to widespread ‘blanket assessment’ of contractors.

This in turn led to unhappy contractors, who were losing out on income if placed under the wrong status, with a number choosing to continue their contracting career under an umbrella company instead, while others took end clients and agencies to tribunals or simply moved across to the private sector, a move that is sure to have had an impact on public sector projects.

Following their introduction, debates about if or when reforms would be extended into the private sector began. Therefore, for the business world, 2018 was a year of anticipation as industries across the UK braced themselves for the announcement of the future of IR35 in the private sector, within the Autumn Budget.

With much speculation that IR35 reforms would be introduced in April 2019, there was relief within the business world when it was announced that its introduction will be delayed until April 2020, providing much needed extra time for businesses to prepare.

How can businesses prepare for IR35 reforms?

With an in-depth consultation occurring prior to the Autumn Budget announcement, it is thought that the government has recognised the need for further preparation for private sector reforms, following feedback throughout the consultation period.        In fact, the government has announced that small businesses will initially be exempt from the reforms, and that it will instead only apply to medium to large businesses. Small businesses will be defined as a company that matches two of the following criteria:

  • Turnover less than £10.2 million
  • Balance sheet less than £5.2 million
  • Less than 50 employees

To further support businesses the government will be publishing in-depth guidance on the process of determining status, as well as guidance for contractors on what to do when they disagree with a decision made with regards to their IR35 status.

For agencies, this guidance will be vital in ensuring that both contractors and end clients are to remain happy with their decision-making process when it comes to the IR35 reform, as well as ensuring that they remain compliant with HMRC guidelines each step of the way.

Despite the fact that businesses are still becoming accustomed to 2019, it is essential that preparation for April 2020 begins as soon as possible. Here at Exchequer, we are dedicated to ensuring our agency partners are confident in their ability to pinpoint the accurate IR35 status on a case by case basis. If you are seeking further guidance please contact Exchequer today to speak to our IR35 experts.

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