On the 29th October the 2018 UK budget was announced by the Chancellor of the Exchequer, Philip Hammond. Amongst the announced details one particular change caught the eye of recruiters and contractors alike. The reveal that, as anticipated, IR35 off-payroll rules which were introduced into the public sector in April 2017 will be extended into the private sector in April 2020. Interestingly the private sector rule changes will not be applied to small businesses, although the exact criteria for how size is defined are yet to be confirmed.
IR35 has been in place since 2000 and hasn’t changed; it is the emphasis on who is responsible for making status evaluations which has shifted. The purpose of IR35 is to make sure that individuals, who work like employees, should be taxed like employees rather than as self-employed individuals. For a full explanation on how IR35 works please refer to our guide.
The off-payroll rule change in the public sector put the emphasis for assessing the IR35 status of an assignment on to the end client. The recruitment agency then had to pay the company in line with this determination. If the end client assessed them as self-employed, the agency could continue paying the company gross. If the end client’s assessment showed that the assignment was more akin to that of an employee, the recruitment agency had to pay employers NI and the apprenticeship levy on top of the rate they had agreed. They then had to deduct tax and national insurance, paying the contractor’s company the net salary. This has had the effect of substantially reducing take home pay and decreasing agency margins.
There were many reports of the HMRC CEST tool (used to assess IR35 status) not following case law, public sector department providing blanket assessments causing incorrect determinations, contract rates being illegally reduced to cover employment costs, contractors leaving the country due to loss of earnings and many more issues have caused a serious headache to HMRC, end clients, agencies and contractors alike. These issues, coupled with HMRC losing a series of IR35 cases over the intervening period, has led to significant lobbying efforts and a huge amount of feedback being provided to HMRC as part of the private sector off-payroll rules consultation.
Despite the negativity surrounding the introduction within the public sector, the announcement of its extension in to the private sector hardly came as much of a shock. It does appear that requests to not rush the changes in April 2019 have at least been heeded. There is still 18 months to go until the changes in the private sector come into effect but it is likely that the CEST tool will be heavily used in the run up to the change. If the private sector implementation is going to succeed, then HMRC really need to ensure that the tool is making the right determination. If the feeling in the market is that it is unreliable and incorrectly assessing people, it could leave HMRC open to future challenge and potentially having to repay contractors their overpaid tax.
Many are already predicting that the private sector change will closely mirror what happened in the public sector. In the run up to the changes it is likely that there will be a significant educational push by recruitment agencies to try and discourage the blanket assessment approach. Private sector contractors are likely to now pay more close attention to IR35 status and will be positioning themselves for assignments outside IR35 come April 2020, where possible. In most cases though contractors will have to prepare themselves for the worst – confusion, uncertainty and a battle to continue getting the tax advantages and freedoms of using their own limited company.