IR35 is an important piece of tax legislation that continues to throw up problems for people working through intermediaries, along with those who employ them. Originally intended to tackle the problem of false self-employment, HMRC is still concerned that it isn’t being enforced rigorously enough, at a cost they estimate as £400 million per year to the Exchequer.
Essentially, HMRC felt that people were leaving full employment, setting up as a Limited Company and contracting for the same client under the same basic conditions. In doing so, they were working as if employed by the client, but taking advantage of a more tax-efficient set-up. The job hadn’t changed, but the tax revenue dropped sharply.
Since 2000, IR35 has been taking the Limited Company out for the equation for a lot of people, many of whom who had believed they were legitimately self-employed. If a worker was considered to be working as if employed, then the Limited Company was on the hook for tax and National Insurance purposes.
Since HMRC still isn’t satisfied that people are complying with the legislation, they’ve been making some changes. For one thing, they’re becoming a lot more aggressive in making employment status challenges – but they’re also changing some of the actual rules. The changes so far are limited to the public sector, but it they turn out to be effective, then a private sector roll-out might well be on the cards later.
The main thing that’s changing on the 6th of April 2017 is that the liability for determining whether IR35 applies is shifting to the public sector body itself, or to the agency engaging the PSC if applicable. In fact, when IR35 was first considered in 1999, this was how it was supposed to work anyway. However, a backlash against the rule saw the burden shifted to the worker’s Limited Company instead.
The trouble with laying all this at the doorstep of a public body is that they’ve really never had to deal with it before, and will probably want to play it safe. If those bodies decide to adopt a default position that IR35 applies whenever the question arises, a lot of legitimately self-employed people are likely to get caught in the tax net. These workers will quickly find that their money is coming in with PAYE tax and National Insurance deducted as if they were employed by the client. At the same time, since general employment law isn’t affected by the changes, they won’t be entitled to all the benefits and rights that employed workers enjoy.
For people suddenly finding themselves stuck in this position, it’s easy to imagine many deciding against accepting public sector clients in future. Public bodies could have to make difficult decisions on how to replace skilled workers who have moved to exclusively private sector work. Those who stay on might be expected to demand higher rates to make up the shortfall, which would be difficult to refuse with skilled workers suddenly thin on the ground. Ultimately, the final cost to the Exchequer could actually rise.
Just to make all this concrete, let’s take the example of an IT contractor working on a crucial NHS project. From April, the NHS decides it’s safest to apply PAYE and National Insurance to the contractor’s pay. Faced with a drop in earnings and no additional employment rights, what would the contractor’s incentive be to continue taking on public sector work?
Of course, the legislation itself is not changing, only the burden of applying it. Theoretically, if a public body or agency determines that IR35 applies, then it should still apply to private sector contractors working under similar conditions. however, the problem is in how accurately and consistently the tests are applied. A “play-it-safe” attitude might protect public bodies from the “stick” end of the legislation, but that wouldn’t make it the correct decision in every case. An HMRC tool is on the way to help agencies and public bodies apply the criteria correctly, but a one-size-fits-all solution hardly seems to reflect the range and complexity of circumstances it’s going to be applied to.
Worse still, there’s going to be very little time for these decisions to be made. All payments to contractors made after the 6th of April will have to be considered under the new rules, regardless of when the contracts they apply to were signed. No time has been allowed for bodies and agencies to consider their positions or plan for the fall-out. The promised calculator tool has yet to materialise, so no one in line to be affected by the changes is in any position to predict or prepare for their outcome.
As for what to do now, the best advice is not to rely on any generic tool to make important and complicated decisions. It’s taken literally hundreds of years of case law to bring the legislation to where it is now, and a few generalised multiple-choice questions can’t accurately address the complexity of it. As the Office of Tax Simplification itself recently said:
“Employment status is a complex and wide-ranging subject that many have said has no real solution – and that if we did manage to ‘solve it’, we should immediately move on to world peace as we’d clearly be on a roll.”
An important wrinkle in the new system is that, even when there’s an agency standing between the worker’s Limited Company and the public body, the public body still has the responsibility for determining whether or not IR35 applies. They then have to inform the agency of their conclusion, as spelled out in a letter from Chief Secretary David Gauke to all Secretaries of State. However, it’s hard to argue that the finding of a public body would necessarily be binding on an agency. Agencies, ultimately, would still be well advised to form their own their own opinions. It might be harder for an agency to make the case that IR35 doesn’t apply if a public body believes otherwise, but it’s definitely going to be worth investigating before implementing any decisions handed down from a public sector client.
Of course, a key consideration is going to be how that implementation will actually work in practice. There’s some murky water here. Agencies will have to put people on PAYE and pay National Insurance, but how Limited Companies are supposed to handle the situation hasn’t really been explained. For example, there are huge question marks hanging over the kind of payroll software needed to tackle the administration, and so far no solid answers are being offered.
Furthermore, not every type of contractor will be treated equally. For instance, special rules, exemptions or provisions are being made for, amongst others Construction Industry Scheme workers, Managed Service Companies and foreign entertainers.
RIFT Legal Services is ideally placed to offer a comprehensive review of how both clients and Limited Companies operate. We can provide detailed information and advice as to which workers are caught by IR35, and ensure full compliance with the law. Our team has a world-class background in IR35 compliance and associated legislation. We also have expertise in handling employment status inspections and defending clients against HMRC challenges.
In fact, we’re seasoned and confident enough to offer a unique gurarantee: should any penalties or liabilities ever arise from a successful HMRC challenge on our watch, we’ll bear them ourselves.
Find out more about our IR35 Services and get in touch for any further information.