IR35 in the Private Sector: What you need to know
Back in September, Kingsbridge Contractor Insurance's Legal Manager, Nicola Hayman, teamed up with Andy Chamberlain, Deputy Director of Policy at ISPE, to deliver a special webinar for contractors who may find themselves caught up in next year's private sector IR35 reforms. The webinar attracted a huge 970 contractors, all keen to find out more about whether IR35 will affect them and how it will be different to the already-rolled-out public sector reforms.
If you have an hour and a cuppa, you can sit down and watch the webinar on YouTube. But if you'd prefer to read about it, then don't worry. We've summarised the important points of the webinar into this article so you can get through it a bit more quickly.
You can still grab that cuppa first though....
IR35 and its public sector roll-out
According to Chamberlain, IR35 is a "deadly cocktail of complexity, tedium and importance".Complicated because, as has been aptly demonstrated, it's hard to know when it applies, boring because it relates to tax (not many people find tax very interesting), and important because the government are prioritising IR35 tax compliance. Which, ultimately, means contractors need to get around the complexity and overcome any sense of boredom because, well, it's happening.
So how is your IR35 status determined? In the first instance, there are three key factors to consider to determine status:
- Personal service - Can you send a substitute to do the work in your place without requiring permission from your client? If you have an unfettered right to do this then you can argue that IR35 doesn't apply to you.
- Mutuality of Obligation (MOO) - This is a highly contested feature as people define it differently and, Chamberlain says, the government have applied an extreme definition to their reforms. Ultimately, there must be obligations on both parties (contractor and client) to do something for one another for IR35 to apply.
- Control - Who controls the work that's being done? Contractors shouldn't be controlled by their client in the way an employee is controlled by their employer.
In order to make a case that IR35 does not apply to you, you'll need to be able to demonstrate that at least one of these factors does not apply to your contract and working practices However, other factors can be taken into account as well. This is known as the business-on-own-account test which was brought to the fore earlier this year when HMRC lost its IR35 case against presenter an journalist Kaye Adams. This test looks at whether you are in business on your own account or whether you are "part and parcel" of the organisation by examining things such as:
The argument from HMRC is that if your answers to these questions suggest you are actually "part and parcel" of the organisation, then you are a disguised employee and, therefore, IR35 applies. HMRC claim that there is widespread non-compliance on this, but Chamberlain points out they have lost six out of seven of their last IR35 cases since the roll-out in the public sector, so perhaps non-compliance isn't quite as widespread as they believe.
So, what changes do the IR35 reforms mean? Put very simply the changes mean that a contractor's IR35 status will now be determined by the end engager, not the contractor as it currently is. If a contractor is found to be within IR35, they will be taxed at source in the same way as a permanent employee. However, unlike a permanent employee, they will not have any employment rights and will still need to charge and pay VAT.
Predictably, this has created issues in the public sector:
- Public sector bodies are notoriously risk averse and so blanket decisions were made, bringing contractors inside IR35 when there was no reason for them to be. TfL and the NHS both did this initially, revising their approach later after the damage had been done.
- As a result, many contractors left or are preparing to leave the public sector (31% according to an IPSE and CIPD joint survey in January 2018).
- Because of this, rates are rising meaning the public sector now has to pay more to get work done.
- Many people are paying employment taxes while being denied employment rights.
Now, we're sure you can see where the "complex and boring" bit comes from. But forewarned is forearmed and, at Kingsbridge, we think it's important to understand the detail of what's happened already in order to understand what will be happening in the private sector next year.
IR35's private sector roll-out
As most of you will know, IR35 will be rolling out in April 2020, as announced by then-Chancellor Philip Hammond in the 2018 Budget (and as predicted by IPSE and most other industry bodies when the public sector reforms were announced).
The first thing to note is it will only affect contractors working for medium and large private sector end clients (note this is not the size of the recruiters). HMRC categorises these, at present, as any company with an annual turnover of more than £10.2 million, or a balance sheet of more than £5.1 million, or more than 50 employees. So, anything above any one of these criteria means a business falls into the medium or large category and so is liable for IR35.
If this applies to you, the major change is that your PSC no longer determines your IR35 status and is no longer liable for ensuring the correct tax is paid.
- Your end client now determines your IR35 status
- Your fee-payer is liable for ensuring correct tax is paid
- Tax will be paid at source (PAYE), usually at the basic rate dependent on earnings
- The end client and fee-payer may be one and the same if your client pays you directly, or they may be two different entities if you are paid via an agency
Your end client will provide a Status Determination Statement (SDS) outlining your IR35 status and their reasoning. This will be passed down the chain (where necessary) from the end client to the fee-payer. Liability transfers with the SDS, so if a party in the chain fails to pass the SDS on, then they become liable for non-compliance. The SDS is based on the engagement, not on you as an individual. So, you could be caught inside IR35 on one contract but not on another. In fact, you could be working on two contracts at the same time, one within IR35 and one outside of it.
A big difference to the public sector reforms is that there will be a client-led status disagreement process so there is an agreed process for you to challenge the SDS if you don't believe it's correct. Your end client has 45 days to respond from when you push back, although they are not under any obligation to change their decision. It at least means that there is some way to formally disagree with decisions though something that was missing from the public sector reforms.
What can contractors do to prepare for IR35 reforms?
Hayman is very clear that if your assignment is legitimately outside IR35 then you should be able to continue working in this way. Equally, you should ensure you review your working arrangements prior to next April to avoid being caught by IR35 unnecessarily.
She suggests you can prepare for this by:
- Discussing your role with clients and recruiters
- Ensuring you understand the new process
- Understanding what defines your status (look back at the points made earlier or take a look at the Government's CEST tool)
- Checking your business insurances - you will still need this as long as you are contracting through a limited company
- Checking your working practices against your contract (You can get a review from our specialist IR35 review partner Larsen Howie)
- Renegotiating your contract in time for the reforms especially if you have been working outside IR35 on 5 April, but will find yourself within it on 6 April on the same engagement
- Considering other models of working (where necessary)
- Being aware of unscrupulous umbrella companies (for instance those who claim to offer big take-home numbers)
- Doing your research -In August this year, the Government published guidance for clients and agencies which can be found on the UK website. Draft legislation has also been published
- Speaking to experts
At Kingsbridge, we've already been writing lots to help contractors understand the IR35 reforms and aim to have more expert guidance available over the next few months so keep up to date with our blog for all the latest.