IR35 for the private sector: six key questions answered
As we warned in our March 2018 blog, there was always a high probability that the IR35 reforms the government introduced to the public sector in April 2017 would be applied to the private sector. Now that distinct possibility is a reality.
In the Autumn 2018 budget it was announced that IR35 reforms will be introduced to the private sector in April 2020.
That at least leaves businesses that engage limited company contractors with a reasonable period of time in which to prepare. Provided they start assessing where they stand now, and then swiftly develop an appropriate action plan, that is.
Do nothing, however — or too little too late — and the consequences could be extremely damaging financially, and time-consuming too.
So what does it all mean for your business? How should you prepare? And what should you be doing now to minimise the risk to your business? Below we answer six key IR35 questions.
1. What is IR35 in a nutshell?
IR35 (or the ‘off-payroll rules’ as it is sometimes called) is shorthand for a number of pieces of UK government tax legislation that target tax avoidance by contractors operating via a limited company; contractors who, HMRC says, should really be classed as — and taxed in the same way as — permanent employees of their end client.
In short, if limited company contractors work in much the same way as a permanent employee of that end client, then logically, as HMRC sees it, they should be paying the same or very similar taxes on their earnings as permanent employees.
2. Who shoulders the burden of IR35 tax compliance?
Here’s the rub. When IR35 reforms were applied to the public sector, government shifted the burden for compliance with IR35 from the end contractor to the entity engaging or paying the contractor.
Along with this shift came a shift in the risk of non-compliance — the liability for unpaid tax moved from the end contractor to the entity paying the contractor. If you engage contractors, that ‘entity’ could be your own organisation (the organisation to which the contractor provides his or her services) or it could be an intermediary such as a recruitment or resourcing agency.
3. What size of business will be affected by the latest IR35 reforms?
The government has said that its IR35 reforms for the private sector will only apply to medium and large businesses. As yet there is no indication how they will define ‘medium’ and ‘large’ in terms of turnover, say. A consultation process is set to take place on this and other issues, so watch this space.
However, if the government follows the definition set out by the Companies Act 2006, then IR35 in the private sector will likely apply to businesses with a net turnover of more than £10.2 million, a balance sheet total of more than £5.1 million, and more than 50 employees.
4. What should I be doing now?
If you engage contractors, it will be up to you to apply the various IR35 tests and decide whether a contractor is inside or outside IR35 before the engagement begins. If they are inside IR35 you, or whoever is paying the contractor, will have to ensure that the correct tax is deducted from payments made to them.
And what about those contractors you already engage with? Naturally, the same applies: you need to apply the IR35 tests and, if applicable, deduct the correct tax.
5. Might a company that pays contractors require specialist and/or legal help to apply the IR35 tests and address other IR35 challenges?
Quite possibly, yes. IR35 tests are complex and difficult to apply. Each assignment has to be judged on its own facts and merits and often the decision comes down to a matter of judgement – there are lots of grey areas. Recent case law has only served to further demonstrate the complexity as the courts have repeatedly overturned HMRC findings. The tests will be even more of a challenge if you have, say, 20 or more contractors.
Employment law, and IR35 specifically, are areas in which we specialise here at The Legal Director. If you need advice, just get in touch.
6. Isn’t there a quick and easy answer to the IR35 issue?
The temptation for many companies will be to find that contractors are inside IR35 as this will remove the company’s tax risk. Indeed, this is what has happened in some parts of the public sector.
However, this is only a superficially attractive option and could have disastrous consequences on the costs and timescales of projects or regular services in which the contractor is engaged.
Why? Because if the limited company contractor becomes subject to higher taxes (particularly if the reasoning is for convenience and expediency), this will of course make the engagement much less attractive to them. As a result they may well seek a rate rise or simply decide to walk away from the engagement.
What to do, then, if you engage limited company contractors?
The one thing to emphasise above all else is that doing nothing will cost you money — and potentially lots of it.
Similarly, put off addressing IR35 until the last minute and you run the risk of difficult conversations with your contractors — and the knock-on risk of problems with time- and cost-critical projects.
With help from a specialist such as The Legal Director you should start to review contractor roles, carry out proper IR35 assessments (beware of simply relying on the Government’s online employment status check which produces a positive response in the majority of cases and has been the subject of ridicule), and ascertain whether tax is legitimately payable.
Don’t underestimate the work involved ahead of go-live in April 2020
Initially you will need to determine the correct employment status for any contractor. But that is by no means the only challenge. Contractors may dispute status assessments; contracts and systems will have to be updated; and, as mentioned earlier, there are likely to be commercial negotiations over contractor rates.
Those business that have not started formulating an IR35 plan should not underestimate the work required to be ready for go-live by April 2020.
What you cannot afford to do any more is to engage with a contractor and to think, or hope, that they are outside of IR35. Those days are gone. Get it wrong, and you could very easily end up with a very large tax bill a year or so down the line.
As ever, we can help and advise.
To find out more, pick up the phone, or email firstname.lastname@example.org
Posted Friday, January 18th, 2019 by Warren RylandTweet
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