Contractors’ questions on the new ‘off payroll’ working reforms are beginning to be answered, as the government announces draft legislation for the Finance Bill 2019-2020. IR35 in the private sector, as it is commonly referred to, is due to take effect from 6th April 2020.
It is important to note that this is not entirely new legislation but an extension of the current public sector legislation, with some modifications for the private sector.
What are the main points to be aware of for IR35 in the private sector?
- The end-client becomes responsible for making the decision as to whether the engagement falls within IR35. If they decide it does, the contractor is deemed to be an employee for tax purposes and tax is taken at source.
- The new proposals apply to the private sector and the third sector i.e. charities, voluntary and community groups, social enterprises, mutual and cooperatives.
- Only medium and large organisations, as defined by the Companies Act (2006), are included in the proposals. Small companies are exempt. According to the Companies Act (2006), a small company is one which satisfies two or more of the following criteria in one year:
- Turnover of no more than £10.2 million
- Balance sheet total of no more than £5.1 million
- No more than 50 employees
- Contractors working with ‘small companies’ retain the power to determine their own IR35 status.
- The end-client must produce an SDS – Status Determination Sheet. This is a written statement which provides a conclusion to whether the engagement falls within IR35 and the reasoning for this decision.
- The end-client must ensure reasonable care is taken in providing the SDS.
- The end-client must provide a copy of the SDS to the Personal Service Company or PSC.
- The end-client must also pass the SDS onto the party directly below them in the contractual chain. This becomes particularly complicated if there are several agencies involved.
- The draft legislation states the agency immediately above the PSC in the contractual chain and who holds the SDS is deemed to be the Fee Payer – the party who is responsible for ensuring the correct tax is applied to the PSC
- End-clients are responsible for implementing a disagreement process. There is no guidance on what this should involve, only that the end-client has 45 days to respond. If the end-client fails to respond within the 45 days, they are automatically assigned the position of Fee Payer
Why are the changes coming in?
The government argues that the changes are necessary so that people doing the same job, for the same employer, pay the same employment taxes. Interestingly, the government does not expect any major economic impacts to occur due to the proposed changes, but research by FCSA (Freelancer and Contractor Association) predicts that around 13% or 78,000 individuals will leave the industry.
If this is true, many organisations could find themselves losing skilled contractors, which potentially puts many projects at risk.
We are disappointed that the government has pressed ahead with plans to implement the new IR35 rules, especially given the issues that were experienced in the public sector roll-out and also at such a crucial economic time for the country.
In the public sector, many organisations adopted a ‘blanket assessment’ on all contractor roles, which seemed to ignore the ‘reasonable care’ approach, which was required of them. Many of our clients who were affected with their contracts subsequently negotiated higher day rates to compensate them or secured other ‘outside of IR35’ work elsewhere.
This meant that many public sector organisations found themselves with a skills shortage and the risk of projects being delayed. Since then, we have found many organisations adopting a more commercial approach with regards to IR35 status and genuinely working with their contractors to ensure working arrangements are in line with an outside of IR35 position. We think a similar pattern will emerge in the private sector.
Many private sector businesses have started to communicate plans with their flexible workforces and variety of approaches have become common knowledge. Notably, HSBC and Morgan Stanley have made clear their plans to reduce their contractor workforces by either terminating contracts or offering permanent positions. RBS on the other hand have said they will collaborate with contractors to ensure working practices are sufficiently robust to support outside of IR35 status where appropriate. Time will tell how the rest of the private sector deal with the reforms.
What should you do?
For current contracts, it remains very much business as usual. However, for future extensions or new contracts, your end client will need to tell you whether the role is considered to be outside of IR35.
The draft legislation includes some detail on a disagreement process – we would urge you to ensure that your client has fairly assessed the role and, in cases where an inside of IR35 status has been arrived at you request an SDS.
Although the process for challenging IR35 decisions is not yet clear, we will be monitoring this and will be happy to support you where ‘reasonable care’ has not been used in coming to that conclusion.
Some agencies and end clients have been preparing for this and advising in advance on the likelihood of a contractor being “caught by IR35” from April 2020 and suggesting using an umbrella company.
It is important to know that you can still use your Ltd company and it may still be the best way of operating even if caught by IR35 in the new rules, as a subsequent contract may not be.
For all SG clients we include for free as part of our accountancy packages the ability to switch between limited and umbrella for your contracts if needed.
Click here for further information on SG Umbrella or call us to find out what is involved in working with an umbrella company.
Make your views count
It’s time to have your voice heard! The government has asked anyone who may be impacted by the draft legislation to give their feedback.
Hurry though as you only have until 5th September to do it. We will be making our views known, and we’ll keep you updated on any news relating to the draft legislation.
If you feel that you’ll be affected in any way by the proposed changes, speak to us on 01962 867550.