Private sector IR35 reform – what it means for contractors

When the reform to the Intermediaries Legislation (also referred to as IR35) was introduced to the public sector in April 2017, many in the industry speculated it wouldn’t be long until it was extended to the private sector. Well, they were right.

In his last Budget speech before Brexit, Chancellor, Philip Hammond announced that plans had been passed to introduce IR35 reforms to the private sector.

We discuss what this means for contractors working through their own limited company for private sector clients.  

The reason behind the reform

It has long been a belief of HMRC that there is what they call ‘widespread abuse’ of non-compliance of IR35. This has coined the term ‘disguised employment’. This is where an employer hires an individual on a self-employed basis (thus saving money through not having to pay Employers National Insurance Contributions or use a payroll software) when they should be using an employment contract. The individual also benefits as they can make significant tax savings by working through their own limited company.  

HMRC hail reforms introduced to the public sector in April 2017 as a success. They have the opinion that it has reduced non-compliance as well as contributing an additional £410 million through income tax and NIC.

If they chose to ignore non-compliance in the private sector, HMRC believe they could lose around £1.2 billion per year by 2023. By pushing ahead with the reform in the private sector, they believe that the 10% of people who abuse the system will no longer be able to do so.

Who the reform will affect

There are different numbers floating around, but it is estimated the reform will affect around two million contractors working through their own limited company and who are engaged with private sector clients. It will affect contractors working across multiple sectors, including IT, Engineering and Marketing for instance.

What it means for contractors

As with the public sector, the responsibility for determining the IR35 status of a contract will shift from the contractor themselves to the engager or end-client, but only if they are deemed as a medium or large business.

As yet, there is no official definition of what constitutes a medium or large business. However, if it follows the definition set out by the Companies Act 2006, it could be a business that meets two of the following criteria:

• A business with a net turnover more than £10.2 million
• A business with a balance sheet total more than £5.1 million
• A business that has more than 50 employees

It’s important to point out the method for determining the IR35 status is not changing, so effectively if you are outside of IR35 now you should remain to be so after 6th April 2020. But, if come 6th April 2020 you are deemed as being inside IR35, you will be taxed at source, like if you were an employee.

What to do next?

If you think you will be one of the two million contractors who may be affected by the reform, you should seek professional advice from an experienced contractor accountant immediately. Even if you think you won’t be affected by the reform, we recommend that you have regular contract reviews to make sure you are on the right side of IR35. We offer this service as part of our monthly accounting packages. Give us a call on 01962 867550 to discuss which package will be most suitable for you.