IR35- what happens next?
By PaperRocket Accounting, Nov 6 2018 05:09PM
It was finally announced in the Budget last week that the IR35 reform introduced into the public sector in 2016 was indeed going to be rolled out into the private sector. This is something that those in contracting circles had been anticipating for a while, although the details may not have been exactly what everyone expected.
What was announced?
Our full Budget breakdown can be found here, however, in short, Philip Hammond announced that after consultation into IR35, he would be introducing reform into the private sector.
However, rather than bringing this in from April 2019 (as many had feared), it would instead be implemented from April 2020.
It would also only be effective for medium and large end clients. We now know that the definition of “medium and large” companies will follow the definition set by the Companies Act 2006, whereby two of the following conditions must be met to be defined as medium or large:
• Turnover of more than £10.2 million
• Balance sheet (net assets) total of more than £5.1million
• More than 50 employees
There will also be another consultation carried out over the coming year, presumably to refine the reform before it is brought about, so we will let you know the details of this once it is announced.
What does this all actually mean?
For those affected, this reform will mean that instead of contractors themselves being responsible for determining their own IR35 status, it will lie in the hands of the engager (i.e. the end client). If the client determines that the contractor is inside IR35, then they must deduct tax and NI from any pay, as well as paying employers national insurance. The rules around IR35 itself are not changing, simply who makes the decision.
The concerns for many are that a) as any liability for incorrect outside IR35 assessment would now fall on the client, they may just err on the side of caution and deem their contractors to be inside and b) the HMRC’s CEST tool (which is meant to assist with IR35 status determination) has been condemned by many as not fit for purpose.
It is also worth noting that even though the reform is ‘only’ being brought in for medium/large clients, in reality, this will affect the majority of contractors as most do work for large clients.
However, that does not mean to say that there should be panic. Let’s not forget that many predicted the end of the contracting industry when IR35 was first brought about in 1999, and that certainly didn’t happen. And whilst this reform is, it’s fair to say, not ideal news to the contracting community, here are some reasons why it is not the end of the world:
• April 2020 is still a very long way away, and in that time, we still have the (always exciting) matter of Brexit to deal with. Anything can happen in 17 months, especially with the uncertainty that surrounds us at the moment. As it is, Mr Hammond has already said that there will be an emergency Budget in the event of a no-deal Brexit, so nothing is set in stone. There is another consultation regarding this scheduled for this time, and it won’t be until next Summer at least that we have the details of the legislation.
• Many, many contractors are legitimately working outside of IR35. In fact, of the 1600 IR35 enquiries that Qdos have represented contractors in, only 3 have actually be found to be inside IR35. A lot of private sector companies rely on their contractors and will not want to drive them away by declaring them inside IR35 when they are either no, or alternatively, when they can make changes to ensure that they are definitely outside. And luckily, whilst HMRC do encourage the use of their CEST tool, it is not a requirement. The issues with the CEST tool have been well documented, so it is hoped that the private sector will use other methods to determine IR35 status.
• We should not assume that what happened in the public sector is destined to happen in the private sector. Firstly, the public sector had next to no time to prepare for the entirely new reform, whereas the private sector now has 17 months and the ability to use hindsight as to where it all went wrong in the public sector. Secondly, because the public sector were essentially guinea pigs for this reform, they were much more likely to be over cautious, hence why many contractors received blanket inside IR35 assessments. And thirdly, knowledge is power. Having seen the problems caused in the public sector, many companies will be employing the knowledge of IR35 experts to assist them in making the right decisions.
So, it is important not to panic. We will of course keep you up to date with all of the latest IR35 goings on, including the consultation when it is announced.
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