Are you prepared for IR35 in the private sector?
Peter Livingstone, director of contracts & interim at Redline Group
IR35 has been one of the hottest topics in the recruitment industry since the chancellor of the exchequer’s announced that the rollout of IR35 ‘off payroll’ rules in the public sector would be extended to the private sector.
Changes lie ahead
The IR35 consultation, which opened early in March, as the Government asked for feedback from contractors and temporary workers, recruitment agencies and contractors’ clients – each of whom will be impacted by next year’s tax changes.
From April 2020, the responsibility for setting IR35 status will be passed from contractor and interim worker to the medium and large private sector companies that engage these workers. The liability will also be handed from the worker to the fee payer – often to the employer or recruitment agency.
Contractor and interim workers have always played a vital role in the UK economy as a niche talent that is always upskilling; moving from contract to contract to provide critical resources to growing companies. This is particularly true for the engineering and technology sector who require a wide range of assistance in r&d, business growth and project activity.
The technology industry is continuing to grow globally – despite the slowdown in the wider economy – and with it, there is an increasing skills shortage that the UK is struggling to correct.
Today, the UK’stTemporary and interim industry is worth £30.85 billion and employs an estimated 1.6 million workers (nearly 6% of all employees), forming a key component of the UK labour market.
HMRC IR35 consultation
The consultation document includes a series of questions posed to stakeholders, along with information on HMRC’s specific plans for IR35 reform, which will be introduced on 6th April 2020.
The Government has said the IR35 consultation will inform the draft Finance Bill (closing 28th May), which will be closely aligned with changes that are enforced next year.
The use of personal service companies (PSCs) in the public sector was addressed by the off-payroll legislation in April 2017. HMRC’s consultation document ‘off payroll’ working in the private sector’ broadens the reach of this legislation across the whole industry, extending the rules to the private sector.
While nothing is set in stone at this stage, the assumption is that “fee payers” may carry the liability in the private sector, if everyone in the supply chain fulfils their responsibilities.
This means that every business using contractors need to understand how IR35 affects them and be able to assess whether their workers fall in or out of ‘scope' of the legislation for each assignment.
The reform will only apply where the client is a medium or large business, or a public body, which means there is an exception for clients who are small businesses. The Government has chosen to use the definition of 'small company' in the Companies Act 2006, mainly because businesses and accountancy professionals should already be familiar with this definition and to what extent it applies to them.
The Act says that a company will be regarded as small if it has two or more of the following features:
Turnover: Not more than £10.2m (previously £6.5m)
Balance sheet total: Not more than £5.1m (previously £3.26m)
Average number of employees: Not more than 50 (no change) Both tests would be measured on an annual basis in the same way as the Companies Act test.
One-size fits all approach
To cope with public sector changes that were enforced in 2017, several organisations blanket-placed contractors inside IR35 – mainly to protect their own liability. This practice is not compliant and left many contractors paying tax at a similar rate to an employee, without receiving any employment rights in return.
In the consultation document, the Government did acknowledge this, but claimed it hadn’t seen any evidence to suggest blanket determinations have been “widespread”.
It did, however, make it clear that placing all contractors inside IR35 without a fair assessment is not compliant. The cost of working inside IR35 is significant to contractors.
Why the next 12 months are crucial
Early analysis will give a view of your current contractor processes and an indication of the IR35 status of your Personal Service Company (PSC) workers, giving you the opportunity to consider any scope for optimising business processes for off-payroll (IR35) compliance.
We believe the contract and interim market will remain strong thanks to the huge demand for niche contracting skills, a desire for digital transformation and the flexible opportunities on offer in the UK. Talent is what drives a business forward, and contingent workers are a key part of the mix, it’s worth noting that contractors add significant value to the economy, along with adding invaluable expertise to businesses which require specialist input to complete projects. As we move towards April 2020 and businesses gear up for legislative changes which may affect them, IR35 should be a key consideration otherwise they risk being at a disadvantage if unprepared.
We have produced a guide “Reform to Off-Payroll (IR35) Compliance in the Private Sector?” which serves as a helpful introduction to IR35, answering the important questions as they relate to a business. It explains what IR35 is, how to check if workers fall inside the legislation and what to do about it.
As businesses look to achieve a more flexible operating model, including a more agile workforce, the number of people in contract and temporary roles are expected to increase.
Photo provided by Redline Group