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A lot has changed since we last took a look at the government’s proposed IR35 regulations. HMRC plans to put a stop to ‘disguised employment’ with their IR35 tax reforms shaking up the world of contract law. Both businesses and contractors are scrambling to prepare for the looming April 2020 deadline to avoid an unwanted visit from the taxman.
With many public sector contractors still unhappy with the 2017 tax reforms, HMRC will have a hard time executing an effective private sector plan without significant disruptions to the workforce.
Join us as we take a look into IR35 to get a clearer picture of how the private sector will be affected and prepare for the changes.
What is IR35?
In our February article, we explained HMRC’s decision to extend the public sector IR35 reforms to private UK businesses.
IR35 is a piece of tax legislation designed to stop ‘disguised employees’ from reducing their tax liability by supplying services through a limited company.
Employing individuals as off-payroll contractors means they’re exempt from employee benefits including holiday pay, National Insurance Contributions (NICs), sick leave, and pension contributions.
Why is the change happening?
The IR35 tax reforms are an attempt to claw back the lost tax contributions from off-payroll contractors who claim to be working outside IR35.
HMRC estimates that each year, a staggering £1.3 billion is successfully avoided by UK contractors who deem their employment status to be outside IR35.
The April 2020 changes aim to clamp down on these losses by setting clear guidelines to determine whether an individual is working ‘inside’ or ‘outside’ IR35.
The employment status of an individual will take the following factors into account:
- Control. The more control a business has over the contractor’s day-to-day responsibilities, the more likely he/she is working inside IR35.
- Substitution. The harder the contractor is to replace, the more likely he/she is working inside IR35.
- Financial risk. A contractor working outside IR35 will carry some financial risk. For example, any cost of correcting errors would be covered by the contractor, and mandatory unpaid holiday periods.
- Mutuality of obligation. A contractor is more likely to be working inside IR35 if the business is obligated to provide work and he/she is obligated to accept it.
- Part and Parcel. A contractor is more likely to be considered insider IR35 if they receive the same benefits as permanent employees like access to the company gym, a company car or participate in any company initiatives like employee appraisals.
Preparing for IR35
Whether you’re an employer or a worker, preparing for IR35 in advance of April 5th will help avoid any last-minute mistakes that may come back to bite.
Our top tip is to conduct an overhaul of your existing practices based on the results of the HMRC’s employment status checker. Think about how you or your business needs to adapt to IR35 and whether or not you need to take any action to remain compliant with the new regulations.
We highly recommend giving advance notice to contractors and encouraging them to seek specialist tax advice in relation to their own specific circumstances. The earlier you act, the more likely you are to resolve potential conflicts and sustain positive relationships with valued contractors.
Checklist for Making Sure Your Prepared for IR35
By working through these points, you should be able to make sure contractors remain outside IR35 and your company can continue to operate as normal.
- As part of your contract review, make sure all contractors have the right to substitute and document how they can send in a replacement. It’s not enough to have an informal agreement. You need to have it written down.
- Review and update your onboarding process to make sure you discuss how contractors can substitute and create documented evidence.
- Assess current workflows and make sure contractors have control of how they deliver services. Make sure to gather any evidence of self-direction; for example, by using service descriptions rather than job responsibilities to measure performance and output.
- Amend contracts to make it clear that contractors will be responsible for equipment costs and will need to remedy any substandard work at their own expense.
- Consider using unpaid leave to provide further evidence that contractors are operating with some financial risk.
- Make sure your contractors don’t receive any employee benefits and are on-boarded and treated differently from permanent staff members.
- Review contracts to make sure there isn’t any ‘mutuality of obligation.’
Will HMRC be ready on April 2020?
On July 11th 2019, the government published draft legislation which reaffirmed the April 2020 deadline for enforcing the off-payroll reforms in the private sector.
The long-awaited changes will affect all contractors who are paid through personal service companies, recruitment agencies, and all large/medium-sized end clients.
Teething problems
Despite confirmation that the changes will go ahead, some experts are casting doubt over whether HMRC themselves are prepared for IR35.
With less than 35 weeks until D-Day, the deputy director of policy at IPSE, Andy Chamberlain, expressed his concerns over HMRC’s execution of IR35 in the following statement:
“April 2020 is an unrealistic deadline — implementations should be delayed for at least another year.”
Simon Moore from Contractor UK argues that the technology required to make accurate assessments of an individual’s employment status simply aren’t up to scratch.
He believes HMRC’s check employment status for tax (CEST) isn’t fit for purpose and fears the government aren’t doing enough to support the private sector in implementing IR35.
A group of forward-thinking business advisors have taken matters into their own hands by developing their very own employment status tool. The experts at Grant Thornton have used state of the art AI technology to create a checker that (they claim) outperforms HMRC’s software.
Get ready for April 2020
If you’re a contractor, well done for clicking on this article — it’s important to do your homework and understand how IR35 could affect your personal position. Everybody’s employment status is unique.
Take the time to figure out what the changes are and how they could affect you. This way, you’ll be prepared for April 5th and avoid any unexpected slaps on the wrist from HMRC.
If in doubt, we always recommend seeking advice from trained professionals if you need clarity over your own tax and legal position.
The government has until 5th September 2019 to make any last-minute tweaks to the draft legislation published last month. We’ll be keeping a watchful eye as the IR35 saga continues to unfold and businesses prepare to make changes ahead of April 5th.
We recommend taking the time to clearly understand the proposed changes, assess how they could affect your position, and plan ahead to avoid getting caught out.
Should we move to fixed term contracts?
The looming enforcement of IR35 has triggered debate over the best practices for filling temporary job vacancies.
Increasingly, businesses are moving away from hiring daily rate interim contractors and turning towards fixed-term contractors (FTCs). FTCs offer similar flexibility to temporary contracts, yet they’re paid in the same way as permanent employees.
FTC workers are required to pay income tax and NICs under regular Pay As You Earn (PAYE) guidelines.
- For contractors, FTCs bring most of the perks of full-time employment, without the long-term commitment of a permanent contract.
- For businesses, FTCs are one option to consider for standalone projects or help to fill the shoes of employees who’ve taken extended leave.
A move to FTCs gives businesses and contractors legroom to make sure their employment situation is compliant in advance of the April 5th deadline.
Recruit or Hire with Change Recruitment
Whether you’re thinking about switching to a permanent role or need to hire new employees to replace contractors, we can help. Speak to one of dedicated recruitment consultants to learn more about our services and how we can connect you with the best talent or opportunities.
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