The private sector IR35 reform has been cemented to go ahead in April 2021 after MPs voted against another delay to the new rules on Wednesday evening.
MPs David Davis and Ed Davey forwarded an amendment to the Finance Bill to delay the controversial changes to IR35, known also as the off-payroll rules, after much campaigning against them from across the contracting industry and following a damning House of Lords report that highlighted many issues with the legislation.
Contractors, recruiters, and end clients operating in the private sector should not delay in getting ready for the reform.
What does the IR35 reform mean for the private sector?
The private sector IR35 reform has been a source of contractor concern since it was announced back in 2018, following the roundly criticised public sector reform in 2017.
Limited company contractors typically benefit from income tax relief due to not receiving employee benefits like holiday and sick pay or a pension, in addition to covering overheads like providing their own equipment.
The IR35 legislation acts to decide if a contractor is genuinely self-employed or is simply looking for a quick-win increase in their take-home pay via this tax relief. This reform essentially shifts the responsibility of deciding a contractor’s employment status (i.e. whether they’re genuine or not) from the contractor themselves to the end client.
If you’re not already familiar with IR35 and what it means for contractors, you can read more about it here.
In a report published by the House of Lords titled Off-Payroll Working: treating people fairly, many issues were raised with the ‘flawed IR35 framework’ and the Lords strongly advised that HMRC consider all other alternatives to the off-payroll rules as they are currently. Warnings that the government has looked at the issue ‘too narrowly’, and that ‘it has severely underestimated the costs to business of implementing the changes’ are abundant throughout.
“Our inquiry found these rules to be riddled with problems, unfairness, and unintended consequences,” said Lord Forsyth of Drumlean, Chair of the House of Lords Economic Affairs Finance Bill Sub-Committee. “The potential impact of the rules on the wider labour market, particularly the gig economy, has been overlooked by the government. It must devote time to analysing all of this. A wholesale reform of IR35 is required.”
“Contractors already concerned by these uncertain times now have the added worries of paying more employment taxes and having their fees cut by clients making additional National Insurance Contributions,” he continues. “Also concerning is the number of companies getting rid of contractors or applying uncompliant blanket determinations in anticipation of the implementation of these new rules.”
Start preparing for IR35 reform as soon as possible
The private sector reform was originally delayed by 12 months in reaction to the Coronavirus pandemic, with the government not wanting to limit the use of the flexible workforce any more than necessary in such uncertain times. Groups like Stop the Off-Payroll Tax have lobbied for a longer delay of up to 2 years in support of the full legislative review that House of Lords proposed, but to no avail.
Many contractors – and indeed, recruiters and end clients – will be sorely disappointed at the decision to plough ahead with these detrimental new rules at such a pivotal point for the UK economy. However, it’s important that all points of the supply chain begin preparations as soon as possible if they haven’t already.
“The lack of interest from the government to delay the reform further than they already have is, in my eyes, hardly surprising,” says IR35 Consultancy Manager Matt Tyler. “After the impact that Covid-19 has had (and continues to have) on the UK economy, the Government will be looking to use any tool available to them to recover – the IR35 reform is no doubt seen as being one such arrow in their quiver.”
“It is however not all doom and gloom as recruiters and end clients have likely seen what a future with improperly managed IR35 processes looks like and have now had time to put in place systems to help fairly assess a contractor’s status,” he continues. “With the extra time, we’re likely to see a greater amount of agencies/clients taking things seriously this time round and less ‘blanket determinations.’
“There is a significant opportunity for recruiters to use this time to properly educate their end-clients and work with them to develop a clear path to a solution that maximises their ability to retain their contingent workforce outside IR35 and minimise their costs, rather than adopting the panic measures that some were being forced into,” says Kingsbridge Legal Manager, Nicola Hayman. “Indeed, our expectation is that winning recruiters will be those that implement and embed their new IR35 compliant processes with clients as early as possible. This will give them a real long-term competitive advantage with end-clients versus those who don’t take action now and leave their clients scrambling when it comes to the deadline.”
“Even when using HMRC’s own calculations, the vast majority of PSC contractors are genuinely self-employed – but processes must be put in place to ensure this talent pool can be used in a compliant way, backed by insurance for extra peace of mind,” she continues. “Now, more than ever, businesses will need to rely on flexible workforces to adapt to demand in an uncertain market – and April 2021 will be here before we know it.”
How Kingsbridge can help you get ready for the IR35 reform
There are many things you can do, no matter where you sit in the supply chain, to make sure you’re ready come 2021.
End clients and recruiters should use this time to refine their processes and ensure that each and every contractor is assessed fairly. While CEST may be recommended by HMRC as the go-to tool for IR35 status determinations, there are other, more tailored options available that are just as valid. There’s an argument to opt for a ‘manual’ or ‘hybrid’ status review over an automatically generated determination; after all, no matter how thorough the questionnaire, the nuances of certain arrangements could be missed without a specialist to interpret the answers. It may take longer to receive your determination, but the results will be far more reliable. You also have direct access to the specialist that carried out the review, meaning that you can ask any questions you may have about the results and how they may affect you.
Contractors should also make sure they fully understand their IR35 position and getting a professional status determination is the best place to start. It’s also worth investing in IR35 insurance. A good policy will include an IR35 status determination, as well as cover unpaid tax debts, interest, fines, and legal fees, and will flex with the reform roll out to cover the contractor, recruiter, and end client. Our IR35 Protect product offers the above in one comprehensive package.
However, the most important thing to remember is that collaboration is key. Maintain good communication during the whole IR35 process and encourage transparency throughout the supply chain to keep business contacts on-side. There has never been a more crucial time to pull together as a workforce.
