Private sector IR35 changes in April 2020

UPDATE 18/03/20:

Last night the Government announced that due to the ongoing Covid-19 situation, they are delaying the IR35 reforms due to come into effect on 6 April 2020. These rules are not cancelled, they are delayed for one year and are now planned to go live on 6 April 2021. This delay gives contractors and agencies more time to adjust to working with the new rules whilst the economy is in an unknown situation.

UPDATE 07/02/20:

The Government has made changes to the off-payroll working rules. The rules will now ONLY affect payments made for services provided on or after 6 April 2020. Any payments made for services provided before this date will not be subject to the new rules. This should hopefully give hirers a little more time to properly assess their contractor workforce.

Contractors – what are you doing about it?

It’s been talked about nearly as much as Brexit in some circles, the ‘Off-payroll working rules’ introduced in the public sector in April 2017 are now being brought into the private sector. No information has been provided by Government as to whether the public sector changes helped in increasing tax revenue. Don’t expect much this time either.

Up until now, it has been your responsibility as the limited company contractor to ascertain what your IR35 status should be. This is usually given as an ‘inside’ or ‘outside’ decision. This then indicates whether you are running a genuine business, or if your working practices are more like that of an employee. This will be changing and from the 6 April 2020 hirers, also known as end-clients, in the private sector will now be responsible for determining your IR35 status.

This new legislation will only affect medium to large hirers. Small hirers, fitting into the following categories, are excluded:

i. Turnover of no more than £10.2 million
ii. Balance sheet total of no more than £5.1 million
iii. No more than 50 employees

Now, if you’ve been busy working and not kept up with the office gossip, you may be wondering why contractors are unhappy with these changes. Well, the issue that contractors like you, who operate through your own limited company are facing is that you intend to be supplying services as a genuine business. But if the hirer doesn’t recognise this, or simply ignores their responsibility in the upcoming determination process, you will effectively be treated as an employee with no say in the matter.

It will work like this:

The hirer will do an IR35 assessment of your role and will give the status determination statement (SDS) to your agency, if there is one. This statement will define how you are to be paid. If you are found ‘outside’, then nothing changes and you will continue to be paid in the same way as before. The problem comes if you are found ‘inside’, as then the legislation states that the party closest to the contractor, known as the ‘fee payer’ – which will generally be your agency – will have to operate PAYE and make ‘deemed employment payments’. Heavy penalties will ensue for agencies getting this wrong!

One point to look out for is that any payments made to your limited company after 6 April, but before the status determination has taken place, will likely see agencies/hirers deducting tax and NI to be on the safe side, although it could be the wrong thing to do. It is best that hirers and agencies start working towards these changes immediately so that contractors like you aren’t negatively affected.

Contractors need to do the following:

• Push hirers to do individual assessments. Far better for all involved, if found outside-IR35 you can continue providing services as a genuine business, and hirers retain flexibility in their workforce.
• Ensure that assessments are done well before next April. If there is a dispute on status, there is a resolution process but it’s long winded and no guarantee that the hirer will change their mind.
• If found inside-IR35, persuade the agency/hirer to remain working through your limited company. You will retain your business image, your take home pay may not suffer a significant drop, and your company will come in handy when other outside-IR35 assignments come your way.

A word of warning – it is likely some organisations might develop exotic, non-compliant ways of working through offshore schemes or different types of bodies (consultancies) or weird and wonderful ways of taking unrealistic take home pay amounts. You could be liable for any back taxes, interest and fines if you’re found to be involved.

HMRC will be updating their CEST (Check Employment Status Tool) to reflect the changes, but the tool hasn’t been without controversy. Remember, HMRC will want as many contractors to be found inside-IR35 as possible, as that will increase tax revenue for them. Work with your agencies and hirers to manage the changes intelligently and have all contracts and working practices assessed individually. If your specialty is rare or in-demand, the hirer will not want to lose you.

The tool doesn’t properly recognise mutuality of obligations between the contractor and the hirer, and HMRC have lost some important IR35 cases this year where this point has been the deciding factor. We would recommend all contractors to have an independent expert examine their contracts and working practices, and those that are found outside-IR35 by the experts should still carry insurance. HMRC have issued this fact sheet for contractors regarding the changes to off-payroll working rules.

As a final point, some hirers may take an unduly cautious approach and only want to engage with PAYE contractors, such as through an umbrella company. If you are affected, we urge you to speak to your accountant as soon as possible as they can then advise of possible options. As you are a limited company client of Dolan Accountancy, we will give you free use of our FCSA accredited umbrella employment service through Contractor Umbrella. This means that you can continue to pay your monthly accountancy fee as normal but will have no margin deducted from your umbrella income. Perfect for inside-IR35 contracts.

Please contact your accountant on 01442 795 200 should you wish to discuss IR35 in more detail.