IR35 and the private sector: are changes on the way?
As the government considers extending to the private sector its public sector reforms of the rules relating to the engagement of contractors through so-called personal service companies, is your business at risk?
Our view—if you engage contractors—is ‘quite possibly’. For in our experience, many businesses do not understand the very complicated rules that govern the engagement and tax status of contractors.
Until now, there hasn’t really been a downside to this.
The contractor has been happy to shoulder the negligible risk of a HMRC tax investigation into their ‘IR35’ status.
And the engager enjoyed the cost savings of not having to pay such things as employers’ National Insurance, holiday pay, sick pay, and maternity leave—knowing that in the event of any HMRC investigation, it would be the contractor who would be liable for any tax payment, not the engager.
Having rushed to roll-out a reform of who is responsible for deducting and paying the tax owed by contractors inside IR35 within the public sector in April 2017, the government then announced that it would consult on introducing similar reforms to the private sector in early 2018.
Obviously, a large reason for introducing the reforms was that the government felt that it would collect more tax as a result. However, as we were told by government at the time, another very significant reason was that it wanted to stem the flow of unwelcome headlines.
From television presenters at the BBC, to doctors within the National Health Service, it had become apparent that a number of individuals who might ordinarily be regarded as regular employees were instead providing their services through personal service companies—and consequently benefitting from the more favourable tax regime.
Going forward, declared the government, the public sector body engaging the contractor through a personal service company had to apply the IR35 tests themselves. If it was found that the contractor should be treated as being inside IR35, then tax had to be deducted from payments made to the contractor, just as if they were an employee.
And if the engager made an erroneous assessment, and HMRC investigated, then the engager would have to foot the tax bill.
Voting with their wallets
Enter the law of unintended consequences—and a further set of unwelcome headlines.
For many in the contractor community chose to stop working for the public sector, and elected to work only for the private sector, where their invoices were paid in full, rather than after the deduction of tax.
Right across the board, public sector projects ran short of skilled manpower. Deadlines began to slip, and costs began to rise. Contractors’ rates rose, too, as those who stayed in the public sector demanded more money, to compensate for what they saw as the added costs of working for the public sector.
An initiative meant to secure taxation compliance had instead had a significant adverse effect upon the delivery of public services.
Next up: the private sector?
It was widely expected that the government would announce a consultation on rolling the same compliance regime out to the private sector in the Spring budget. This didn’t happen. But this doesn’t mean that the government has abandoned its plans. Government is still indicating that it feels that the reforms should apply to the private sector as well, due to the amount of tax that it believes is being avoided.
We don’t know yet whether these reforms will be applied to the private sector. But when the reforms were introduced to the public sector, it happened very quickly, with the final draft of the legislation being published only three weeks before the implementation date.
And if these changes are introduced, then it will place a significant strain on companies using contractors, as they will be required to assess the work being performed by every contractor that they engage, in order to decide whether they fall inside or outside the IR35 regime.
A tighter regime
In our view, and as borne out by what has happened in the public sector, if these changes are introduced to the private sector it is likely that a significant number of contractors currently retained through personal service companies would be found to be inside IR35.
The tests to assess IR35 status are very long and complex. But when the practicalities of how a contractor works are considered—e.g can they chose when, where and how to perform their role?—many contractors would fail the no ‘supervision, direction, and control’ requirement.
The duration of many engagements would also act as a red flag to HMRC: we are aware of an instance where a contractor had been working on site for 12 years!
Companies will be much more likely to err on the side of assessing a contractor as being inside IR35 when the consequences of getting this wrong could be a tax liability for them.
What to do?
In short, it’s time to tighten things up, ahead of HMRC imposing a potentially expensive obligation to do so.
The starting point? Understanding who you are engaging and on what basis. This includes the use of temporary workers as well as contractors. Before taking on a worker consideration should always be given as to whether the role being performed is best done by a temporary worker or a contractor, or whether a fixed term employment contract would be more suitable.
As ever, we can help and advise. To find out more, pick up the phone, or email firstname.lastname@example.org
Posted Thursday, March 22nd, 2018 by Warren RylandTweet
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