Posted Wednesday 22nd January 2020
The taxation rules are changing for contractors providing their services through intermediary companies. Any such contractor’s tax and national insurance contributions must now align with those of an equivalent employee, wherever it is deemed that the individual’s role within the business, in reality, matches that of an employee. In April, measures are being introduced that transfer the burden of responsibility from the contractor to the hiring business, for establishing the correct working status of the individual being provided by the intermediary company (i.e. whether they genuinely are a contractor or if, for tax purposes, they should be treated as an employee).
The 2020 reform will bring the private sector into line with the public sector, where similar measures were implemented back in 2017.
IR35 is being reformed to combat a perceived increase in tax avoidance by both individuals and businesses, through hiring contractors and freelancers instead of employees, thereby avoiding the cost burden of national insurance contributions (NICs) and other employee benefits.
IR35 rules were originally introduced in the UK in 2000, but have been largely ineffective, as individuals who are working like employees but who operate via an intermediary, such as a personal service company (PSC), have had to ‘self-assess’ whether the rules apply.
Consequently, HMRC estimate that there is widespread non-compliance which they have been unable to effectively tackle. The new rules will only apply to medium and large businesses in the private sector i.e. those with a turnover of more than £10.2m, 50+ employees and a balance sheet total exceeding £5.1m.
Now, a government review of the IR35 changes, announced on 7th January, has been widely panned as nothing more than lip service to an election campaign pledge to address concerns.
This is because:
The review is also due to assess “whether any additional support is needed to ensure that those who are simply self-employed with no intermediary company in between, therefore falling outside the scope of the rules, are not impacted”.
There is a genuine fear that the burdensome administrative obligations of the changes and increased cost to businesses will result in companies refusing to hire intermediary company contractors altogether.
We have already seen some major companies, including GlaxoSmithKline, Barclays, HSBC and Lloyds, ditch limited company contractors in fear of falling foul of the new rules.
From the outset IR35 has been mired in controversy because there is a considerable lack of clarity in both the original legislation and HMRC’s guidelines. Indeed, even HMRC’s own Check Employment Status for Tax (CEST) tool is widely viewed as unfit for purpose and inaccurate, with businesses using the tool reporting they have received indications that IR35 will not apply when it clearly will.
Going forward, the government will also need to tread carefully when imposing penalties: a zero-tolerance approach from the outset will do nothing but continue the trend of employers stopping the engagement of intermediary company contractors altogether, which is surely not the intended effect of the legislation.
The government must ensure that more resources are made available to assist employers in determining whether or not a contractor is within the scope of the new rules. A thorough review of its CEST tool would be a good start.
Similar issues of uncertainty and lack of time to implement legislation occurred when these changes were implemented into the public sector in 2017, and now history appears to be repeating itself.
The timing of the review period means that private sector businesses now have very limited time to digest the application of IR35, implement any necessary changes and reform its payroll.
All this is also occurring at the same time as businesses face juggling Brexit and other employment law changes, such as the government’s Good Work Plan coming into force this April.
In our view, the government should consider delaying IR35’s implementation so that businesses and individuals contracting through an intermediary know exactly what is expected of them. Adequate preparation would also avoid businesses from taking drastic measures such as not engaging contractors at all to avoid falling foul of the new rules.
For the time being, however, the IR35 changes are unavoidable and businesses must work together with their intermediary company contractors in order to prepare for them.
We are helping employers to access each relationship they have with such intermediary company contractors to see whether there is likely to be an IR35 issue. We are also helping employers to review and revise their commercial agreements with such contractors to make sure that, on paper, they reflect the true nature of the relationship.
This article is for reference purposes only. It does not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking or deciding not to take any action.
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