How will the IR35 changes affect private sector employers?
If you’re currently hiring people on a contract basis then there are some tax changes HMRC are pushing through that will potentially affect you from April 2020. Here’s our guide to what’s changing, why and how it will affect you.
What is IR35?
IR35 is a piece of legislation that governs how contractor tax should be calculated.
Why should I care about my contractor’s tax?
The new legislation means that any company hiring contractors will be responsible for checking their IR35 status.
What’s the current situation?
Contract and permanent employees currently pay their taxes in different ways. Contractors typically take their earnings as dividends and pay a lower rate of tax (known as “off-payroll”). The existing intermediaries rules oblige individual contractors to assess their own employment status and apply PAYE deductions if they deem themselves to be within the scope of IR35. For obvious reasons many people would consider themselves outside of IR35.
What changes are coming?
We’ve known that this was coming since the 2018 Autumn statement. The changes are largely in-line with those rolled out across the public sector so companies and contractors have had time to prepare. For any payments made after the 6th April 2020 the client will be required to assess if the role should be treated as within, or outside, the scope of IR35 instead.
It’s important to note that these rules only apply to medium and large companies. If you qualify as a small company then you will not be affected. The Companies Act 2006 defines a small company as meeting at least two of these qualifying requirements:
- Turnover less than £10.2 million
- Balance sheet less than £5.1 million
- Less than 50 employees
Will I be liable for contractor taxes?
The short answer is no. Being tax legislation it is slightly more complicated than that. HMRC has promised that it will honor any result generated by the CEST tool as long as the answers have been given “in good faith”. As long as you’re honest regarding the actual working practices of each contractor and either make the necessary deductions (for directly paid PSCs) or pass the information onto the Recruitment Agency then you’re fine. It is only if a company is subsequently found to have been dishonest when completing to tool that there is a potential liability for unpaid deductions.
How do I check if a contractor is within the scope of IR35?
HMRC recommends that companies use their CEST tool to assess this. This tool isn’t perfect and HMRC admit that it is wrong in up to 15% of cases. There are other options available such as an indemnified status checking service or carrying out your own assessments. When HMRC is considering a contract status they look at the actual working practices, not just the contracts that you have in place.
What is the CEST tool?
This is the online questionnaire created by HMRC to assess employment status. There are 16 questions in the tool but many legal experts believe that the wrong questions are being asked and that there is no scope for real-life nuances. The tool also hasn’t been based on actual case law which essentially implies they’ve made it up as they go along. In short CEST gets a LOT of bad press. For now though it’s what we’re stuck with. If you don’t want to pay someone to do the assessments for you, and aren’t confident about doing them yourselves then completion of the tool is the best way to stay on the right side of HMRC.
What does HMRC consider when looking at off-payroll status?
Previously IR35 status was largely based on the contracts in place so people tended to include “IR35 friendly” clauses, but HMRC got wise to this. Now it is much about the actual working practices, which is part of the reason why the client, and not the recruitment agency, are responsible for making the assessment. Some of the key areas they consider are right of substitution (and who pays the substitute), who is taking the financial risk, if contractors identify themselves to external customers as working for the client or if they’re integrated within the business (ie responsible for hiring/firing, appraisals etc). In short it seems that anyone other than people who are working on specific, short term projects for multiple clients will be considered within scope.
What do I need to do now?
If you currently meet the criteria of a small business then you do not need to do anything. If, however, you potentially could meet that criteria soon you may want to prepare anyway.
If you’re a medium or large company then you’ll need to assess the employment status of all contractors you currently have on-site. If are are deemed within the scope of IR35 then you’ll need to make arrangements for their tax to be processed accordingly.
If the contractor is paid directly by your company then you’ll have to make PAYE deductions and RTI submissions for the contractor. If you hire them through an agency then you’ll need to confirm the employment status of each contractor.
This is an excellent time to check your supply chain. You need to be sure that you’re only working with recruitment agencies and umbrella companies that are fully compliant and financially secure, otherwise there is a risk that unpaid tax liability may transfer back to your company. APSCo and REC are the industry bodies for recruitment agencies. Any umbrella companies in your supply chain should be FCSA, REC, APSCo or Professional Passport accredited to ensure compliance. So you can be confident in our services, we’ve been proud APSCo members since 2013. We will also only work with accredited umbrella companies.
Should I just ban contractors or treat everyone as in-scope of IR35?
There’s probably a good reason why you currently hire people on a contract rather than permanent basis, and that reason won’t change because of IR35. Contract workers still offer a faster hiring process, more flexible working patterns and access to high-demand, rare skill sets. A blanket ban on contractors may negatively impact your business. You may choose to move any contractors you currently pay directly across to a Recruitment Agency so you don’t have the administrative burden of processing their payroll, but there may be a cost implication to this.
There might be a temptation to just assume everyone will be caught by IR35. Again, I would caution against this. Treating a contractor who is outside of the legislation as if they were inside may affect your ability to hire, or may mean you lose existing contractors who will be treated differently with another company. HMRC has also suggested they will put measures in place to prevent this but it’s unclear what those measures might be or how effective they’d be given that it’s in HMRC’s interest for contractors to pay more tax.
What effect will the IR35 changes have on my business’ ability to hire contractors?
Prior to the public sector roll-out there was an assumption that people would move into the private sector, stop contracting or that rates would sky-rocket. Happily, whilst some of this did happen, it wasn’t a widespread issue. Rates are naturally increasing due to a shortage of skills but they may be a slight increase in this. We can already see that Brexit is having an impact on the contractor industry and, in reality, I think this is more of a deciding factor for contractors leaving the industry rather than IR35 alone.
Everyone thought that the public sector changes were going to be catastrophic to the contracting industry but it wasn’t. Yes there will be some slight changes but contracting is still a working model that works well for so many people. That’s not going to change just because of a shift in legislation.
Contact us for more information
We’re more than happy to discuss IR35 with you further and offer any guidance that we can. Please contact us now, for more information.
Victoria is the Office Manager here at Corriculo Ltd. After working as Recruitment Consultant for 5 years, she moved into Office Management over 11 years ago now. Victoria was one of the first members of our team and deals with all of our administration and accounts. Connect with her on LinkedIn