IR35 private sector consultation: What you need to know
The Autumn Budget delivered this week by Chancellor Philip Hammond was better than contractors than many had expected.
But it did include details about a consultation to extend dreaded public sector IR35 compliance rules over to the private sector.
This is a notoriously tricky subject, so we have produced a brief guide will all the information you need to know.
What is IR35?
IR35, also referred to as ‘intermediaries legislation’ is tax legislation designed to combat tax avoidance by workers who operate through an intermediary, such as a personal service company, but who are effectively employed by a company.
HMRC wants these ‘disguised employees’ to pay income tax and National Insurance Contributions (NICs), when in actual fact they pay the taxes of a limited company director, which are usually less.
What are the IR35 changes?
Changes to IR35 rules were introduced in the public sector in April of this year to try and make more public sector contractors comply with the rules.
It used to be solely the contractor’s responsibility to evaluate their IR35 status and report this to HMRC. But the government changed the rules so that it became the end client’s responsibility to carry out an IR35 assessment.
The rules also state that if a contractor who was deemed to be outside IR35 by an end client, is later found to be inside IR35 then the end client could be liable for back payment of taxes and NICs.
What has the impact been?
Given the incentives for end clients and agencies to declare contractors as outside of IR35, many contractors have been declared inside IR35 – in some cases unfairly.
Contractors who are deemed to be inside IR35 can lose up to a quarter of their take home pay after paying the new taxes.
Some public sector bodies have also put a freeze on hiring contractors who use personal service companies, in order to save themselves the hassle of complying with the IR35 legislation.
There have also been reports of public sector bodies finding it difficult to source skilled contractors and of public sector contractors increasing their rates to make up for lost income.
Will the public sector changes be applied to the private sector?
This is the subject of the consultation.
The Chancellor made no mention of IR35 or intermediaries legislation in his speech. But the accompanying document did include this important passage (emphasis added to important sections):
“The government reformed the off-payroll working rules (known as IR35) for engagements in the public sector in April 2017. Early indications are that public sector compliance is increasing as a result, and therefore a possible next step would be to extend the reforms to the private sector, to ensure individuals who effectively work as employees are taxed as employees even if they choose to structure their work through a company.
“It is right that the government take account of the needs of businesses and individuals who would implement any change. Therefore the government will carefully consult on how to tackle non-compliance in the private sector, drawing on the experience of the public sector reforms, including through external research already commissioned by the government and due to be published in 2018.”
Many people believe that the extension of the reforms to the private sector is inevitable, especially given the increase in “public sector compliance”.
Others, however, are a little more positive. IPSE’s Deputy Director of Policy Andy Chamberlain, believes that the IR35 can has been “kicked down the road”.
He said: “There is no explicit timescale provided for when we will see the consultation, but we might reasonably expect it to come around the same time. So 2018 is likely to see businesses large and small making their representations on why this measure would be disastrous. If the external research is thorough, it will highlight the damaging impact on the public sector, and therefore back-up the concerns of the private sector.”
The issue has not gone away, but many hope that the government will see how calamitous the legislation has been for some contractors.
Contractors and large and small companies now have the opportunity to tell the government how they believe the changes will affect them, which could stay the government’s hand.
For our part, Umbrella.co.uk will continue to represent customer interests through membership organisations including Professional Passport and the FCSA.
For more information on IR35 changes and how they could affect you, please speak to an account manager. Call: 0800 121 6513.