In April 2020 the IR35 rules will have been with us for 20 years. At this milestone we will see arguably the most significant change in IR35’s controversial history with the proposed introduction of the private sector reforms. On the 5th March 2019 HMRC started a second consultation on these reforms under the heading “Off Payroll Working Rules from April 2020”. The consultation is open to all those affected and a link to the consultation is found at the end of this article.
The IR35 rules most commonly affect contractors that operate via their own companies. The key question with IR35 is whether a ‘deemed employment’ relationship exists. More specifically the question is whether in the absence of the contractor’s company would the contractor have been classed as an employee of the end client under ‘employment status’ case law. If a deemed employment relationship exists, then the contractor’s company falls within IR35 and is subject to an adverse tax regime.
The April 2020 Private Sector Reforms
The proposed private sector reforms broadly follow the public sector reforms introduced in April 2017. The basics of IR35 are unchanged by the reforms, namely if no deemed employment exists then the contractor will continue to be Outside IR35. What changes is who is responsible for determining whether a deemed employment relationship exists. Previously the responsibility belonged with the contractor’s company. From April 2020 this will rest with the end client.
This is significant because of the PAYE and Class 1 NIC tax liabilities that the end client will be exposed to when they make an incorrect decision. A cautious end client who is in a strong negotiating position is therefore more likely to make an Inside IR35 decision without any compensating increase in contract rates.
There is an important exception for smaller end client companies. If the end client company qualifies as a small company under the companies act, then the private sector reforms do not apply.
Responsibilities along the Supply Chain
Under the reforms the end client has a responsibility to share its employment status decision with the parties in the supply chain. Where an Inside IR35 decision is given the agency paying the contractor’s company is responsible for deducting PAYE and Class 1 NIC. In the event HMRC is unable to collect the amounts due, the proposal is that the liability would be passed to the party that failed to fulfil its obligations, with the eventual default being that the end client would be liable.
Disagreements with Decisions on Status
The consultation asks for views on the introduction of a process to handle status disagreements. The process would be led by the end client. In the absence of such a process the only option available to a contractor that does not agree with a status decision is to make a claim for a tax repayment in his self assessment tax return along with a disclosure.
HMRC’s Online Status Tool ‘CEST’
HMRC’s online tool for determining employment status is known as ‘CEST‘. HMRC undertake not to challenge an Outside IR35 verdict from CEST providing that the information given is correct. While a favourable CEST verdict would obviously be very helpful to a contractor, there will always be some uncertainty as HMRC could take the view that the information entered is not correct.
The accounting and tax profession have widely criticised the tool for failing to take account of existing employment status case law and failing to reflect the complex nature of the private sector.
Actions to take
Contractors working via their own companies with private sector end clients should consider:
1. Carefully looking at contracts that go beyond April 2020.
2. Where an end client is a private company, checking if the company is covered by the small company exception.
3. Ensuring they have a robust Outside IR35 case with a CEST report and/or a 3rd party specialist report.
4. Talking to the agency and end client about the proposed changes to establish what they are planning. Seeking early indications as to how the end client is likely to determine their status. Asking how the end client plans to resolve challenges to a status decision.
5. Avoiding agencies and end clients that have poor reputations on contractual matters.
6. Exploring the wider options available outside contracting
As a final point it should be noted that an Inside IR35 decision does not result in any employment rights being granted to the contractor.
HMRC’s consultation closes on the 28th May 2019 the link can be found at https://www.gov.uk/government/consultations/off-payroll-working-rules-from-april-2020