What will the IR35 reforms mean to you?

While it may feel as if the only subject of concern at present is Brexit, there is new legislation on the horizon which will have a massive impact on the UK’s contractor workforce, if it goes ahead.

The Off-Payroll Working Reforms were expected to be announced in the Autumn Budget on November 6th, but that has now been delayed. They mirror the changes made in the public sector two years ago and are concerned with who is responsible for determining a contractor’s IR35 status.

Yes, it’s not the most entertaining subject matter, but if you’re a contract or temporary worker, please bear with us…it’s important, and could make a big difference to your take-home pay and/or your future work-related plans!

IR35

IR35 was introduced some two decades ago to ensure contractor workers pay the correct amount of tax. A role which is ‘inside’ IR35 will mean you are taxed like an employee whilst a role which is ‘outside’ means you can work through your own limited company or Personal Service Company, and benefit from the tax efficiencies.

There are a number of factors which are taken into account to ascertain whether a role is ‘inside’ or ‘outside’. A large part of the assessment criteria relates to whether a role is subject to any level of supervision, direction or control. If one of these three elements applies then the role is ‘caught’. There are also considerations around what is known as Mutuality of obligation and the right to substitution, but ultimately, HMRC will be interested in whether you behave like, or are treated like, a regular employee.

It’s important to note that the reforms do not affect IR35 status determination, instead they are about who is responsible for IR35 assessment.

The changes in brief

At present, responsibility for determining your IR35 status rests with you, the contractor. This means that if you are not working compliantly, HMRC can come to you to seek recompense.

Under the new rules, end hirers are responsible for status determination, y, should HMRC disagree with the status assessment and decide that unpaid taxes are due. Responsibility filters up and down the supply chain between the end hirer and the employment agency, so neither party can escape liability, even if it does everything ‘by the book’.

Note that there is a small company exemption to the rules, so they will only apply if you work for a medium or large organisation, as classified under the Companies Act 2006 definitions.

Why is this contentious?

It’s a good question: after all, the criteria for status determination isn’t changing. If you’re not considered ‘inside’ IR35 now, this shouldn’t change under the reforms.

The problem is that there is no one reliable tool for status determination, the government’s CEST tool has been criticised as unreliable. When making a status determination, it must be possible to show that ‘reasonable care’ was taken during the decision-making process, though we await detailed guidance on what constitutes ‘reasonable care’.

As a result, we could see end hirers become risk-averse when it comes to hiring contractors – a report earlier this month by Construction Enquirier highlighted the fact that a number of major contractors are already reacting, and several major banks have already announced their intention to treat all contractors as if they are ‘inside’ IR35.

Options

If an end hirer determines that a role is ‘inside’ IR35, then you have to pay tax and National Insurance on the same basis as a regular employee. Contractors in this position could:

  • Join agency payroll (PAYE) – you would be treated the same as an employee from a tax and National Insurance point of view.
  • Join an Umbrella company – you would become an employee of the Umbrella company and pay tax and National Insurance, again, just like a regular employee.
  • Continue to operate through your own limited company – if you do this, it would be necessary for your end client or us as your employment agency to calculate a ‘deemed employment payment’ using the Real-Time Information payroll system. This is your income after deductions including employee and employer NICs and the Apprenticeship Levy. You would not be able to claim tax relief on expenses.

What to do next

While the new rules would not come into force until April next year, it’s important to understand how you may be affected. We will be speaking to all end hirers to find out how they intend to respond to the reforms and will keep in touch with all our contractors to discuss any impact and possible options. If you are not a contractor with Ionic but would like to know more about the reforms, please get in touch, we will be happy to answer any questions you may have.