Changes to IR35 for the private sector will come into force from the beginning of April 2020. If you are currently working as a contractor then it is important that you are fully aware of the changes and the potential impact they could have on you and your working practices. Equally recruiters now need a thorough understanding of the legislation and how it will affect the contractors they place with private sector clients.
The changes have come under criticism but it isn’t all bad news. There shouldn’t be any cause for concern for those who are working compliantly and operate outside IR35. The changes have been brought in by HMRC to tackle false self-employment and target individuals who manipulate the existing system to their financial advantage.
What is changing?
From 6th April 2020 the responsibility for determining contractors’ IR35 status will shift from the contractor to the private sector client. (This has already happened within the public sector.)
Our advice to contractors working with us is to review current working practices and look closely at each new contract to ensure you are confident that your status is correctly defined and you are operating compliantly. If the nature of a contract changes then your status should be reviewed in light of any changes.
Contractors need to be aware that once the legislation comes into force the key responsibility for determining IR35 status will fall on your client. However, it is obviously in your best interest to ensure you are paying the correct tax and benefiting from any tax efficiencies rightly available to you. To make sure this is always the case it is crucial that you ensure your status is correctly defined and it is reviewed regularly.
Companies exempt from reforms
The changes will apply for all contractors working for medium or large-sized private sector clients. There will be an exemption for small organisations in the private sector, so it is important to remember that contractors working for small private sector clients will still be responsible for determining their own status.
HMRC defines small companies based on three main criteria, as set out be the Companies Act 2006.
- Annual turnover not exceeding £10.2 million
- Assets outlined on the balance sheet must not total more than £5.1 million
- No more than 50 people employed by the company
IR35 legislation reforms highlight that a business must take ‘reasonable care’ when determining the status of a contractor. A practical process must be put in place for assessing each member of their contracting workforce, and strongly discourages blanket assessments. This was a huge issue for contractors and end clients following 2017 public sector reforms, and therefore must be avoided at all costs.
An updated version of CEST (the Check Employment Status Tool) is now available online. Following the widely publicised criticism of its predecessor, the new tool has been re-designed to address concerns and ensure it is fit for purpose.
Contractors operating within IR35 were previously provided with a 5% expenses allowance to cover the cost of managing IR35 and calculating a ‘deemed payment’. As contractors will no longer be responsible for determining their own status, this 5% will be removed with the exception of those working with small businesses.
Status determination statements
For each worker the end client must complete a status determination statement. This should outline the reasoning behind a decision, and share this with the contractor and initial recruitment agency within the supply chain. This will ultimately be passed throughout the chain until it has been received by the company paying the final fee.
It should be noted that until this statement has been completed, the liability remains with the end client.
If a contractor disagrees with their status determination then this will be addressed via a new ‘client-led status determination process’.
Should a contractor feel that their status has been incorrectly assessed then they will be able to appeal directly to the client. The client will then have 45 days to respond and provide reasoning for its decision or a new status determination statement.
The draft legislation suggests that the liability for any unpaid PAYE and NIC transfers to the party in the supply chain closest to the client and, if necessary, ultimately to the client itself.
Debt transfer provisions
All contracts in the public sector and those with medium to large businesses in the large sector will be up for scrutiny from HMRC, who will have the right to hold any business with a supply chain liable for missing PAYE should an incorrect decision of ‘outside IR35’ be found to have been made.
How will I be affected?
According to HMRC “Those who are complying with the existing rules should feel little impact. The measure is targeted at individuals who are not compliant with the current rules.”
HMRC have confirmed that they are not seeking to apply this retrospectively and will not carry out targeted campaigns into previous years for individuals starting to pay employment taxes under IR35 for the first time following the change in April 2020.
For those that are genuinely self-employed and operate outside of IR35, there should be no cause for concern. However, as is always the case with changes to legislation, it is important to ensure that you understand the changes and their implications. It is crucial that you as a contractor, or a recruiter, ensure you have the advice and support of a specialist in this field.
How can we help?
At Exchequer Solutions we specialise in our services to contractors and the self-employed. We have extensive experience of dealing with IR35 and related tax issues and are on hand to offer our contractors advice and support.
We recommend looking at each new contract in light of IR35 and reviewing your contracts regularly and every time there is any change to working practices. Our advisors can help with assessing your IR35 status on each new contract and are always available to answer any questions you may have on the imminent changes. If you have any questions or concerns please get in touch on Tony.Burton@exchequersolutions.co.uk 01244 500 195