IR35 changes coming to the private sector in 2019?

With every possibility that the disastrous changes that were made to IR35 in the Public Sector (in April 2017), are likely to be applied to the Private Sector in April 2019, we’ve done a quick resume of how this change has affected Public Sector Contractors (this is from a Contractors point of view, but it’s important for Employers of staff operating through Limited Companies). BREAKING NEWS – this will now be implemented in April 2020, see our post relating to the announcement in the Budget of 29th October 2018 here.

We also look at recent developments (and we’ll keep updating this page as more news come in).

(More details about IR35 are here).

IR35

An Overview: How IR35 is working in the public sector now (September 2018 – this includes several quotes from various unnamed sources)

Since April 6th 2017, the IR35 status for Public Sector Contractors with Limited Companies has been determined by the client, not the contractor. The client has become liable if they make the wrong IR35 determination. This is because HMRC is convinced that a large proportion of contractors are “disguised employees”. This change, means the way which IR35 is enforced in the public sector, shifts the responsibility away from HMRC and onto the end client i.e. the public sector body.

The client needs to assess the Contractors working practices and if they decide that IR35 applies, the contractors company will be taxed at source, exactly as if it were an employee. However, the contractors’ employment status will not change, so they will not receive the rights and benefits that go with full employment.

The HRMC have provided a ‘Check employment status for tax’ (CEST) tool which is designed to test whether an engagement is inside or outside IR35, which you can see here – https://www.gov.uk/guidance/check-employment-status-for-tax 

Notes: If you are declared inside IR35 by your public sector employer, that isn’t to say HMRC will automatically look into previous contracts you might have worked in, to see if they were ‘correct’, either in the public sector or the private sector for that matter. Past projects aren’t automatically included in HMRC’s review – the HMRC only has resources to commit to 250 new IR35 enquiries every year.

Notes: If the public sector body has determined that your current role is inside IR35 and won’t budge from deeming it ‘caught,’ you will now have realised that you’re going to be taking home less money. So what do you do? Firstly, before accepting the ‘inside IR35’ role decision, especially if it’s been made using the CEST tool,  you can have an independent expert assess your status. Secondly, if you are ‘caught’ you can consider negotiating an uplift to the pay rate, to offset the extra tax you will pay. An uplift to your rate will not have any bearing on your chances of an IR35 investigation by HMRC.

Thirdly, how are you going to continue to operate? You can become a full employee paying PAYE with all the ’employment benefits’, or of course continue to use your PSC. Staying inside a PSC means that Contractors can still register for the flat rate VAT scheme whist working inside IR35; and trade through it for other assignments which might be outside IR35.  This ‘Contractor Survival Guide to IR35 Reform‘ from Contractor UK is useful further reading.

We found this example – “How will the public sector changes affect contractors take home pay from 2017?

Below you will find an average take home calculation for those working inside IR35, outside IR35 or through PAYE Umbrella.

2016/17 Outside IR35 Inside IR35 PAYE/Umbrella
Daily contract value £400 £400 £400
Take home * £57,890.46 £55,785.88 £54,927.51

 

2017/18 Outside IR35 Inside IR35 PAYE/Umbrella
Daily contract value £400 £400 £400
Take home * £58,591.92 £55,312.93 £55,239.51


*Please note, the above calculations are just an estimate and are based on 230 working days, some basic expenses and the contractor being on the flat rate VAT scheme (including 1% discount).

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In 2018 HMRC conducted an Off-Payroll Consultation about the CEST tool and these are some of the responses to it (in August 2018, from Contracting Industry Professionals):

‘Holes’

“CEST ignores important elements of case law upon which status must be determined”.

“CEST does not consider the particular kind of Mutuality of Obligation needed to determine whether a contract is an employment contract, or in business on one’s own account”.

‘Impossible’

“The tool fails to reflect what HMRC would look at to determine status”

“In a full status enquiry, HMRC will routinely ask at least 50 questions about the contractual and working arrangements,”

“[So] to reach a status decision that can be relied on based on a maximum of 16 questions [which CEST asks] — with the likely input of only one party — is impossible.”

‘Dangerous’

“Using CEST has essentially been positioned by HMRC as the only way organisations should make determinations,”.

“Many public sector engagers believed, having spoken to HMRC, that CEST is mandatory and that no other method should be used.

“This is both incorrect and dangerous, as we do not feel that the lack of detailed audit trail it provides will give any level of security or certainty in the event of compliance activity.”

‘Lack of guidance’

“The guidance issued by HMRC failed to sufficiently cover the practical application of the new rules, i.e. what public sector bodies would actually have to do. They were very much left to interpret the requirements themselves which, naturally, led to a huge amount of inconsistency across the public sector as a whole.

“Public sector organisations simply didn’t have the expertise or resources needed to fulfil the requirements of the reform. Having never had to deal with tax status in any detail before, many were at a loss as to what to do”.

‘Too many unresolved determinations’

But quite apart from not covering many sectors, CEST does not even cover all contractors. “[CEST] does not reach a decision in 15% of cases”.

Contractors whose engagements require Security Clearance are among those hit hardest by CEST, as its questions on Substitution and Equipment overlook the sensitive nature of their work.

‘Flawed’

“Given the tool does not align with IR35 case law, there is a strong possibility that it has contributed to many incorrect IR35 decisions in the public sector.”

“Although CEST is supposed to be a simple tool to determine status, the black and white nature of the questions do not fit well with making an informed, considered, qualitative appreciation of the whole, and are not necessarily fit for a 21st century labour market, and in particular, the private sector.”

“Over-reliance on substitution – Whilst some status tests hold more weight than others, and this can be said for the right of substitution, HMRC seems to have placed so much importance on the Right to Substitution test that you will likely pass or fail the tool based on these questions alone. In the Courts however, a Judge will not make their determinations based on a single test, but in relation to the contract as a whole”

IR35 reforms “should be suspended without delay”

UK taxman told: IR35 still isn’t working in the public sector, and you want to take it private?

“An investigation ContractorCalculator carried out by testing the tool using previous cases, found it returned a flawed assessment in 42 per cent of cases.”

Obviously, we’ll keep this updated as things become clearer (or not!).


In a related article from Contractor UK, which you can see here, BBC Presenter Christa Ackroyd lodges IR35 appeal almost a year after a tribunal found the PSC-using presenter ‘effectively had a full-time job’ at the BBC, and so was inside the rule.


At the end of September the HMRC lost a very interesting case, which could be the start of an IR35 reform back-lash from freelancers who have been classified as workers under the public-sector IR35 reforms:

Susan Winchester, a Marketing Consultant with her own personal services (Ltd) Company, lodged a claim at  Employment Tribunal for £4,200 in unpaid holiday against the HMRC and four other parties, arguing that it was unfair that she was being treated as a worker for tax purposes (under IR35) but was not given crucial workers’ rights in return.

HMRC engaged Winchester’s company in September 2016 for marketing services. When the tax rules changed in 2017, HMRC analysed the relationship using CEST and determined IR35 should apply to the contract and so Winchester was moved onto an agency payroll.  Under the IR35 rules the freelancer does not have a right of appeal although Winchester did not agree with the decision to apply IR35 to her engagement – “She firmly believed, and still does believe, that she was self-employed.”

The parties settled on the morning the tribunal was due to start, for the full amount claimed. Winchester said “I just couldn’t understand why somebody could make some arbitrary decision about my tax and employment status on a brief, over-simplified questionnaire that I had no input in and seemingly no right to challenge.”

Chris Bryce, CEO of the Association of Independent Professionals and the Self-Employed (IPSE), which funded and backed the legal action, added: “[Winchester’s] case sends a very clear message to clients, that if you are going to treat contractors like workers then you’ve got to give them worker entitlements. You can’t just decide someone is inside IR35, shunt them onto an agency payroll and expect someone further down the line to pick up the tab for your obligations like holiday pay”.

We understand that the holiday pay claim was made under the Agency Workers Regulations.


On 12th October 2018 it was reported by People Management here that:

The government will officially extend IR35 tax rules to the private sector during its Budget announcement on 29 October.

“John Chaplin, partner at EY, said he anticipated Hammond would announce the move this month, with the main question being when exactly the reforms would be introduced.  “The safe money is on it being April 2020. April 2019 is feasible but would allow businesses little time to deal with the changes and may lead to them rushing through measures,” he said.

“Christian Verri, employment tax director at PwC, speculated that the government might announce measures to extend some employment rights to contractors, potentially ending a discrepancy that sees some individuals missing out on legal employment status but still required to pay employee taxes.

“It is entirely possible that the government may introduce further reform such that contractors caught by IR35 will get some level of increased employment rights,” he said.  Verri warned that any IR35 reform would have administrative and practical implications for private sector businesses. “Companies will need to decide where those assessments are carried out – by HR, the tax department, or locally within the business,” he said.

“These reforms will place a considerable burden on business, both in terms of designing processes to make the assessments and then further changes to systems, etc. to move contractors onto payroll where required,” Verri added. “There will also be an immediate cost increase in terms of employers’ national insurance.”

 

 

 

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