IR35 is changing…again. New rules governing who determines IR35 status are coming into force from April 2020 and there are significant worries about the effect the new rules will have on both contractors and clients.
In this article written specifically for companies which employ the services of independent contractors, the Financial Management Centre explains:
- what IR35 is,
- how IR35 rules have changed, and
- working with your contractors before and after April 2020
What is IR35?
Introduced in 2000, IR35 is the term of reference used to describe the process by which HMRC decides whether a contractor is, in their opinion, a “disguised employee”.
HMRC are convinced that hundreds of thousands of contractors and the clients they work for are, in essence, conspiring to deprive them of tax revenue that they’re entitled to. They believe that many clients exert control over the contractors who work for them in a similar way to the way they exert control over full-time, salaried members of staff.
Over the last two decades, a complex set of subjective rules have developed around what constitutes disguised employment. In an attempt to help both contractors and clients determine whether their working arrangement was “disguised employment”, they launched an online tool called "Check employment status for tax" (CEST) – you can use it by clicking here.
According to the Telegraph, one third of contractors should be caught by IR35 although insurance provider Qdos believes that, based upon the evidence of its contractor customers, this figure is likely a gross overestimate. Out of the 1,600 cases that Qdos examined, it found only three of its clients likely to have been found within IR35 had the case gone to the First Tier Tribunal.
How have the rules changed?
Because HMRC believe that misreporting of true IR35 status is endemic and deliberate, they moved the goalposts first in April 2017. Whereas, up until that point, contractors and intermediaries determined IR35 status, now this was the responsibility of clients.
If a working arrangement that was classified as being outside the scope of IR35 was later ruled as being within its scope, both the contractor and client would be required to pay back the tax that would have been collected plus fines and penalties.
In general, contractors know more about the IR35 rules than clients and, because of this, risk-averse clients fearful of fines and penalties from HMRC would be likelier to require that contractors submitted to their work being classed as within IR35 guidelines.
Although the evidence thus far has been scant and often contradictory about the effectiveness of the change to IR35 with work for public sector bodies, the same rules will be extended to medium- and large-sized enterprises from April 2020. IR35 is coming to the private sector.
Companies exempted from the new rules are those which have:
- a turnover of no more than £10.2 million
- a balance sheet no more than £5.1 million
- no more than 50 employees
Working with your contractors
For many of the contractors you work with, particularly those who specialise in private sector work, there is likely to be a lot of confusion and concern over the new arrangements. The difference between working on a contract inside IR35 can be as high as 25% of take-home wages as working outside the scope of the rules.
Many of your contractors will worry that the relevant decision-makers and financial managers within your company will naturally default to declaring all or most contracts within IR35.
The first step you should take is to identify all of the contractors providing services for your business – either contractors you work with directly or those placed via an agency. For contractors currently within IR35 and happy to be so, not much need change other than informing them (if they don’t already know) that, should their contract carry on past April 2020, that your arrangement with them will continue as is.
For those whose contracts are currently outside IR35, you should consult with them as soon as possible to discuss the new rules and ensuring that the current belief that your current arrangement (including the contract governing the agreement) is outside IR35 is correct. You may wish to consult with a solicitor or HR professional at this point – your contractor will need to seek their own advice.
Your HR team should train any person responsible for making IR35 determinations and, after that is done, ask them to identify any current arrangements that apply to all or some contracts which may increase the chance that HMRC may overturn a determination that a contractor is working outside of the scope of the rules.
Under the new guidelines, a contractor may be entitled to ask you to share with them the reasons behind why an arrangement has been placed within IR35 with 45 days – this dispute resolution mechanism will be handled by HMRC.
Also changing in 2020 is the reporting requirements relating to IR35 specific to individual contractors. When the rules changed for public sector contracts in 2017 in cases where a placement of a contractor was made through an intermediary, the client needed only to inform the intermediary of their IR35 determination (and the reasons if requested). From April 2020 with all public sector and qualifying private sector contractors, the client must inform both the intermediary and the contractor themselves.
These determinations must be made and agreed to by the intermediary and the contractor prior to the first payment made after April 2020 under the arrangement.
Get ready for the new IR35 rules with TFMC
If your business regularly uses contractors and you want to be able to use their services outside the scope of IR35, speak to the Financial Management Centre today for guidance on the new private sector IR35 rules. Please call us on 0800 470 4820 or email [email protected]. Our tax investigation and inspection services team regularly assist clients and contractors with IR35 disputes.