Changes to IR35 which came into force in April 2017 have had a significant impact on contractors and recruitment agencies working within the public sector over the past 12 months (i.e. schools, local councils, NHS, police forces, universities, etc).
The changes were introduced to further enable HMRC to target what is often described as ‘false self-employment’. The changes meant that from last April it was no longer up to the contractor to determine their IR35 status. Instead the responsibility now falls with the business paying the contractor (in many cases this will be the recruitment agency). If a contractor is deemed to be within IR35 then a tax deduction must be taken prior to them being paid. This is the case even if the contractor is operating under their own limited company and had previously been in charge of their own tax affairs.
The impact of IR35 in the public sector
The changes were widely opposed by the contractor community and industry in general. A recent survey, carried out by Harvey Nash Recruitment Solutions, found that 80% of contractors believe that the impact of IR35 on the public sector has been very negative. The survey also found that 42% of contractors have had to increase their hourly rates to offset the cost of being within IR35.
In addition to this, the HMRC forum on IR35, held on 11th December 2017, acknowledged that the reforms to IR35 legislation had increased non-compliance within the public sector, and that the government’s own CEST tool (used to determine the status of a contractor) was ineffective.
Extending IR35 to the private sector
During the forum back in December, members stressed that any assessments of IR35 reforms were occurring too early to give a clear picture on the effectiveness of the changes. Despite this HMRC has highlighted an ‘immediate exchequer risk’ which could ultimately mean that IR35 reforms will be extended to include the private sector. This could happen much sooner than anyone previously expected.
Following the conclusion on the government’s consultation on IR35 we expect to see an announcement with regards to changes for contractors working in the private sector in 2018’s Autumn Budget. If this happens then it is anticipated that the changes to the legislation will come into force from April 2019.
There is still uncertainty surrounding how the government plans to address issues with current IR35 reforms prior to its extension into the private sector. Here at Exchequer Solutions we strongly urge the government to consider all aspects of the impact that these changes will have on contractors, recruiters and the economy as a result.
If you are a contractor operating as a limited company or a recruiter concerned about the status of your limited company contractors then speak to us today so we can help ensure you are prepared for any changes and can remain compliant – call us on 01244 500195.