Chancellor Philip Hammond revealed in his Budget 2018 speech that the Government intends to extend the 2017 public sector off-payroll working or ‘IR35’ reforms to the private sector.
This change follows a consultation, which we participated in, to represent the views and concerns of contractors.
The reform will see the responsibility to determine if a contractor falls within the IR35 rules pass from the contractor to the engager or agency. Where the relationship is deemed to be within IR35, the engager would be responsible for operating PAYE on payments made to the contractor.
Until the reform takes place, the contractor will continue to be responsible for determining their own IR35 status.
The announcement will have wide ranging ramifications for contractors and those who engage them. In addition to the compliance burdens the change will create, there will be negative tax consequences where a contractor is deemed to be within IR35.
However, it is important to appreciate that the Government has listened to some of the concerns that we and others have raised and this has blunted some of the disadvantages of the reform.
In a welcome development, the Government has accepted that bringing in these reforms in 2019 would have been too soon and the proposed reforms will be delayed and apply from April 2020 instead.
Are you a contractor and are unsure if you may be affected by this announcement? Call us today on 0800 0523 555 or contact us online here.
We therefore believe that the overriding message at this stage should be not to panic.
In addition to the advantage of the time we have been afforded to prepare for these changes, there are some additional positive messages in the announcement we believe are worth noting.
The Government has committed to undertake a further consultation to ‘refine the design of the reform’. The consultation will be released in the coming months and we believe this will lead to some modifications of the rules which could be beneficial to both public and private sector contractors.
HM Revenue & Customs has also committed to improve the CEST (Check Employment Status for Tax) digital service and the detailed employment status guidance they provide. We believe improvements to the CEST service are critical before any extension of the rules are applied.
Who is excluded
Further good news is that small engagers will be excluded from the rules, although no definition of ‘small’ has been provided. We believe the criteria will be similar to that of the Companies Act 2006 and this would mean a company will qualify as being small if it meets at least two out of three criteria:
- Turnover, not more than £10.2 million
- balance sheet total, not more than £5.1 million
- and average number of employees, not more than 50
It is important to note the above exclusion applies to the organisation engaging the contractor and not the individual contractor. Unfortunately, most contractors will not benefit from this limited exemption, but small engagers stand to benefit.
The Government is aware of contractor concerns that their engagers may use blanket decisions for the employment status of groups of contractors in similar roles without giving the contractor recourse to challenge the decision.
The Government has therefore committed to explore options to remedy the situation where an engager fails to use reasonable care in making their decisions.
HMRC will also set out what contractors should do when they do not agree with the engager’s decision on their employment status.
For all these reasons, we are hopeful that the voice of reason is being heard by the Government and the legitimate use of a company to provide services will continue to be an acceptable way to arrange working practices going forwards.
Some preliminary analysis is already indicating that the majority of contractors may not be impacted by these changes, once the planned improvements to the process have been implemented.
It is also worth pointing out that HMRC continue to advise that there’s no such thing as an ‘IR35-proof’ contract. HMRC won’t just look at what’s written in the contract. It will look at the actual working relationship between the contractor and their client. A contract will only be relevant where if it reflects the individual circumstances of the work engagement.
We are aware that contractors will be receiving communication from a variety of sources inviting them to have their contracts reviewed and obtain various insurance products. Our advice for now is to remain calm and wait to see how things develop.
The one positive action we would recommend contractors take now is to start the process of engaging with their client. We believe this should be the first step you take, before spending money on services which may offer very little protection to you.
We will continue to feed into this discussion and represent the views of contractors and will keep you informed and advised.
As ever, if you want up-to-date guidance on the developing IR35 rules in the public or private sector, feel free to contact your local TaxAssist Accountant for professional advice on 0800 0523 555 or via our online enquiry form.
For our full summary about how Budget 2018 may affect you, please click here.
By Jo Nockels FCCA
Last updated November 2018
Disclaimer: The information provided is based on current guidance (at date of publication) from HMRC and may be subject to change. Any advice shared here is intended to inform rather than advise. Taxpayer's circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this information, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.