On the 6th April 2021, the IR35 private sector changes will come into effect.
With this date now just a matter of weeks away, it’s important for contractors to understand what the changes involve and how they could affect them.
In this article, we will summarise what IR35 is and what contractors need to know about the upcoming private sector reform.
For a full and comprehensive guide, download our free Contractors’ IR35 Guide. Written by IR35 experts, this will explain everything you need to know.
What is IR35?
The Intermediaries Legislation, known as ‘IR35’ or ‘off payroll working rules’, came into effect in April 2000.
It was created to tackle what HMRC perceived as ‘disguised employment’; contractors engaged through their own limited company (often referred to as a Personal Service Company or PSC) or through a partnership (the “intermediary” of the legislation), but providing services which were indistinguishable from the work undertaken by an employee.
By contracting through a limited company, rather than being hired as an employee, there were benefits for both the contractor and employer, but the Treasury was also losing tax and National Insurance Contributions because it was not collecting PAYE on engagements that seemed closer to an employed relationship than they did to self-employment.
What do contractors need to know about the IR35 changes?
Currently in the private sector, it is the responsibility of contractors to determine their own IR35 status.
After 6th April 2021, it will be up to the end client (the company obtaining the services of the Personal Service Company contractor), to make the decision on whether the contractor is working inside or outside of IR35.
That is unless the end client is defined as a small company, one which meets at least two of the following requirements:
- turnover of less than £10.2m a year
- balance sheet assets of less than £5.1m
- fewer than 50 employees
For these businesses, nothing will change. The IR35 status determination will remain the responsibility of the contractor – as will the tax liability if the contractor gets it wrong.
Medium and large sized end clients will be responsible for:
- making an IR35 decision;
- creating a Status Determination Statement (SDS), which outlines whether IR35 applies and the reasons for the decision;
- communicating that decision to the relevant parties; and
- creating a ‘client-led disagreement process to deal with any challenges to the SDS.
The legislation requires this to be done for each and every engagement and HMRC guidance states that reasonable care must be taken when making the status decision.
This means that blanket decisions on groups of contractors, instead of assessing contractors on a case-by-case basis, will likely fail to demonstrate reasonable care and could lead to the end client being penalised.
What do contractors need to do before the IR35 private sector reform?
Although contractors will not be the decision-maker in the vast majority of engagements, they do have an opportunity to influence the end client and should certainly talk with their end client and agency to understand the engager’s thinking.
Those engagers who take the legislation seriously because they are keen to retain the best contractors may well listen to a well-presented and properly documented argument, but we do acknowledge that ultimately it will be the engager’s decision.
- Have your contract reviewed.
If your current engagement is likely to continue beyond April 5th, it would be sensible to have it reviewed by an independent specialist. A comprehensive review will consider both the contractual terms and the working practices, as well as whether you demonstrate that you are genuinely in-business on your own account and taking financial risk.
The report will offer a clear opinion on the engagement. If this results in an ‘outside’ opinion now and the engagement is continuing on the same basis, then there is a strong argument for it to be treated outside moving forward.
You can find out more about our IR35 Contract Review Service here.
- Challenge the SDS if you disagree with the decision.
If the client takes a different view when issuing their SDS, the legislation requires there to be a disagreement process allowing you to challenge the SDS; and the client must provide a reasoned response within 45 days.
The end client must either confirm the existing decision, with reasoning, or issue a new SDS, explaining the reasons for the change of decision.
If you decide to do this, it’s worth spending time preparing a response with evidence to support your view. You may also want to use the services of your accountant or tax specialist to carry out an independent review of your engagement.
This will add credibility to your argument and could also highlight where a client may not be taking reasonable care in arriving at their decision.
We expect to see significant numbers of ‘inside’ decisions to be challenged and it will be interesting to see what percentage will be overturned by the client. Unless HMRC scrutinise these disagreement processes as part of their future IR35 compliance, we may find that contractors will have little faith in this element of the legislation.
IR35 after April 6th 2021
Once the legislation has bedded in and new engagements arise, it is likely that they will be advertised as either ‘outside’ or ‘inside, meaning that contractors applying for roles will do so knowing whether the engagement pays gross or net.
It seems unlikely that a contractor applying for a new engagement on the basis that it is ‘inside’ will then seek to challenge the decision.
The odds seem to be stacked against the contractor, particularly with the kneejerk reactions we have seen from some end clients, either taking a hard line and when in doubt determining ‘inside’ or seeking to avoid making IR35 decisions altogether.
However, for end clients this is unlikely to produce long-term benefits when other engagers start to recognise that working within the legislation can lead to justifiable outside determinations and the retention of the best contractor talent.
A final note for contractors
For contractors the answer is to be patient and be the best contractor you can be. Those with the skills, qualifications and experience who also demonstrate that they are in business on their own account will pick up these outside engagements.
The UK economy is based on a flexible labour force and whilst contracting will inevitably change, the off-payroll legislation in the private sector absolutely does not spell the end of PSC contractors.
Caunce O’Hara offer a range of IR35-based insurances and an IR35 Contract Review service. Through our partners at Markel Tax, we can also offer you expert advice regarding IR35 taxation.
For further information please call 0333 321 1403.