IR35 reforms will impact private sector contractors and clients
Contractors working in the private sector are set to face a massive change in their taxation status and how they work with their clients following the introduction of IR35 changes next year.
The extension of IR35 changes from the public sector to the private sector is intended to counter ‘shielded employment’ among contractors. HMRC believes that less than 10% of freelancers (limited company contractors, otherwise known as personal service companies – PSCs) actually comply with their tax responsibilities, and as a result, HMRC is missing out on millions of pounds in income.
The legislation aims to stop contractors reaping the same benefits as permanent employees but also enjoying the tax and National Insurance saving opportunities that come with being a limited company. When the IR35 changes come into effect in April 2020, the burden of determining employment status will shift from the contractor to the contracting party – the client in the private sector.
In the run-up to the introduction, contractors and clients are expected to review the IR35 legislation and undertake the necessary preparations. Key is to determine whether or not a contractor is ‘inside’ or ‘outside’ IR35. If a contractor is working like an employee (‘inside IR35’), then the client or company acting as the ‘fee payer’ must deduct employees’ National Insurance contributions and income tax from the contractor’s pay, as well as paying employers’ National Insurance contributions.
While there still are five months to go-live, IR35 is already having a significant impact on the flexible workforce marketplace, said Maninder Murfin from B2E Consulting, a provider of consulting services who use a community model of independent consultants.
“There is still uncertainty in the marketplace, indeed in the run up to the election, major political parties are promising a ‘review’ of the IR35 changes! This uncertainty is contributing to a hesitancy from clients at the moment to write contracts beyond 31 March 2020 and independent consultants are worried about future work prospects as some major organisations are reported to be phasing out the use of limited company contractors, requiring them to operate on a PAYE basis from next year,” she said.
Regardless of the continued uncertainty, stakeholders in the ‘value chain’ – consultants, clients and service providers – are now working to resolve the ongoing ambiguities and action-planning ahead of April.
There remains however much work to be done. According to a survey of 500 UK business decision-makers across multiple sectors by Sullivan & Stanley, a staggering 71% of medium and large businesses (small business are excluded from IR35) are still unaware of the IR35 changes coming into effect on April 6, 2020. Around half of respondents feel that HMRC has to do more to clarify the legislation and 54% believe that they haven’t received enough information.
Meanwhile, in another survey of over 1,200 people by payroll service provider MHR, 74% of companies were found to not be ready for the new rules. In a bid to reduce the number of ambiguities, the government’s HRMC last month rolled-out improvements to its ‘Check Employment Status for Tax’ (CEST) determination tool.
Inside / Outside IR53
Under current guidance, for an engagement by a contractor to be considered ‘outside IR35’, a number of conditions need to be met.
- Independence / Control. The client does not supervise, direct or control how the contractor delivers the services. Further, consultants must not be treated as employees and should not receive the same benefits as employees;
- A right of substitution. The consultant can provide a substitute if he/she is unable or unwilling to do the work and the client has no right of veto as long as substitute has the right skills/qualifications;
- Non-exclusive: Nothing in the contract should prevent the contractor from performing paid work for more than one client concurrently;
- No mutuality of obligation. During an engagement, there is there is no obligation for the consultant to provide any services outside of those documented on the Statement of Work. Similarly, at the end of the contract, there is no obligation for the client to offer more work to the consultant and if more work were offered, there is no obligation for the consultant to accept such work;
- Financial Risk. Consultants should demonstrate some financial risk around delivery of the services – e.g. if rework is required, it should be done at the consultant’s own cost and expense.
“There will be disruption in the market as the new rules are applied, but the trend towards more flexible programme delivery arrangements will continue.”
– Maninder Murfin, B2E Consulting
“There are a few other considerations that should be taken into account, but these are the main ones,” said Neil Tonks, a legislation expert at MHR. Performing an accurate assessment is therefore important, as failure to correctly assess contractors could surprise clients with a major bill. “Backdated demands for unpaid PAYE, tax and NIC, and fines for delays and late submissions, not to mention reputational damage which could impact the ability to attract contractors and other temporary workforces.”
Ultimately, while the introduction of the IR35 changes may deter some clients from hiring contractors, B2E Consulting’s outlook on the changes is largely positive. “There will be disruption in the market as the new rules are applied, but we anticipate that the trend towards more flexible programme delivery arrangements will continue. Clients will still want to maintain a mix of talent within their business transformation programmes,” remarked Murfin.
Commenting on how B2E Consulting will adopt IR35, she said, “Our model of providing a consulting managed service to our clients, primarily utilising our community of 20,000 independent expert consultants, will remain largely unchanged. We have been able to provide our clients a cost-effective consulting model for over 15 years; this is primarily because our community of expert consultants are true experts, independent businesses in their own right and therefore accept the financial risk of being un-utilised.”
According to a prediction by the World Economic Forum, more than half of the workforce in mature labour markets will freelance by 2030, as part of a broader shift towards the gig-driven workforce of the future.
