IR35 rules, changed recently for contractors working in the public sector, may be extended to the private sector very quickly. In its IR35 forum minutes, the government believe that the public-sector changes have increased compliance and that a “possible next step would be to extend the reforms to the private sector.”
What’s happening? SMART Team investigates.
IR35 – what is it?
IR35 was brought in to try to combat what HMRC deem to be “disguised employees”.
As an employee, not only do you pay tax and National Insurance on your wages but your employer also pays another form of National Insurance on top.
If you’re a contractor performing exactly the same services, pre-IR35, you would receive your remuneration gross of tax. You could invoice through a limited company and pay much less tax through a salary and dividend combination. The company contracting your services would not have to pay National Insurance Employers’ Contributions or worry about holidays, sick pay, parental leave, auto enrolment or rights if they dismiss the contractor.
You pay less tax, your employer pays less tax, HMRC are, in their minds, out of pocket. IR35 was designed to stop someone resigning from their job at Company X on a Friday afternoon only to reappear on Monday morning doing the same things at the same location but now as a contractor of Company X.
IR35 introduced a series of tests to determine whether a person was an employee or a disguised employee. If HMRC judge that you are a disguised employee, you will be within the scope of IR35 meaning you will be subject to a different tax regime (which would cost you about 25% more). Indeed, contractors inside IR35 pay 14% more tax than permanent employees.
IR35 – what happened in the public sector?
Up until April 2017, it had been for the contractor to decide whether IR35 rules applied to their engagement with a company. Over the decade or more that IR35 has been in existence, contractors have learned to work around the rules with structured contracts and ways of working with their contacting organisation.
From April 2017, it was now up to the public-sector organisation taking on the contractor’s services on whether IR35 applied or not to the engagement. The power has been removed from contractors completely.
Speaking with Contractor UK, IPSE director Andy Chamberlain, said that “(t)he…legislation puts the burden of responsibility on the entity that pays the contractor. Very often this will be an agency. However, agencies are unlikely to have sufficient information about the working practices so they will ask the client to give an opinion on IR35 status. The client is statutorily obliged to provide an answer within 31 days.”
IR35 – the forum minutes
The IR35 forum minutes from 11 December 2017 were recently published – you can read them for yourself here.
Much of the discussion was around the alleged effects that the public-sector change had had.
HMRC state that the reforms were successful as 90,000 more people were registered than employed in the sectors most likely affected by the change than were expected. However, in the same breath, they have acknowledged that the public-sector reforms have “resulted in a proliferation of tax avoidance schemes, many involving umbrella companies.”
Many accountants believe that it is hard to prove one way or another if the recent public sector IR35 regulations have had the effect desired by the taxman.
The prime driver behind the push to extend the rules into the private sector came from a belief that the government will miss out on £1.2bn worth of taxes by 2023.
Contractor Calculator is far from impressed. Dave Chaplin, its CEO, told the website “It’s farcical. HMRC has published a document, within which it identifies numerous problems with IR35 in the public sector, from non-compliance to flaws with CEST, in addition to inequity in the broader employment status landscape…Yet it seems willing to overlook these issues in a bid to push more money into Government coffers.”
IR35 – can HMRC help with letting me know if I should be on IR35?
Yes and no.
Helpful, yes, but the results given by the questionnaire are not reliable. Shortly after its launch, the Contractor Calculator team conducted a test using the results of 21 IR35 tribunal cases.
In 10% of cases where a judge deemed a contractor did not meet IR35’s criteria, the questionnaire said that it did. In 27% of the answer, the computer said “unknown”.
IR35 – what to do next?
The previous changes to the system have caused a lot of problems not only to contractors but the organisations that take them on. To get the latest on IR35 in general and on the proposed extension to all private sector contracts, call 01202 577 500 or email [email protected] for any help and advice you may need.