IR35 and the private sector: are changes on the way?
As the government considers extending to the private sector its public sector reforms of the rules relating to the engagement of contractors through so-called personal service companies, is your business at risk?
Our view—if you engage contractors—is ‘quite possibly’. For in our experience, many businesses do not understand the very complicated rules that govern the engagement and tax status of contractors.
Until now, there hasn’t really been a downside to this.
The contractor has been happy to shoulder the negligible risk of a HMRC tax investigation into their ‘IR35’ status.
And the engager enjoyed the cost savings of not having to pay such things as employers’ National Insurance, holiday pay, sick pay, and maternity leave—knowing that in the event of any HMRC investigation, it would be the contractor who would be liable for any tax payment, not the engager.
Having rushed to roll-out a reform of who is responsible for deducting and paying the tax owed by contractors inside IR35 within the public sector in April 2017, the government then announced that it would consult on introducing similar reforms to the private sector in early 2018.
Obviously, a large reason for introducing the reforms was that the government felt that it would collect more tax as a result. However, as we were told by government at the time, another very significant reason was that it wanted to stem the flow of unwelcome headlines.
From television presenters at the BBC, to doctors within the National Health Service, it had become apparent that a number of individuals who might ordinarily be regarded as regular employees were instead providing their services through personal service companies—and consequently benefitting from the more favourable tax regime.
Going forward, declared the government, the public sector body engaging the contractor through a personal service company had to apply the IR35 tests themselves. If it was found that the contractor should be treated as being inside IR35, then tax had to be deducted from payments made to the contractor, just as if they were an employee.
And if the engager made an erroneous assessment, and HMRC investigated, then the engager would have to foot the tax bill.
Voting with their wallets
Enter the law of unintended consequences—and a further set of unwelcome headlines.
For many in the contractor community chose to stop working for the public sector, and elected to work only for the private sector, where their invoices were paid in full, rather than after the deduction of tax.
Right across the board, public sector projects ran short of skilled manpower. Deadlines began to slip, and costs began to rise. Contractors’ rates rose, too, as those who stayed in the public sector demanded more money, to compensate for what they saw as the added costs of working for the public sector.
An initiative meant to secure taxation compliance had instead had a significant adverse effect upon the delivery of public services.
Next up: the private sector?
It was widely expected that the government would announce a consultation on rolling the same compliance regime out to the private sector in the Spring budget. This didn’t happen. But this doesn’t mean that the government has abandoned its plans. Government is still indicating that it feels that the reforms should apply to the private sector as well, due to the amount of tax that it believes is being avoided.
We don’t know yet whether these reforms will be applied to the private sector. But when the reforms were introduced to the public sector, it happened very quickly, with the final draft of the legislation being published only three weeks before the implementation date.
And if these changes are introduced, then it will place a significant strain on companies using contractors, as they will be required to assess the work being performed by every contractor that they engage, in order to decide whether they fall inside or outside the IR35 regime.
A tighter regime
In our view, and as borne out by what has happened in the public sector, if these changes are introduced to the private sector it is likely that a significant number of contractors currently retained through personal service companies would be found to be inside IR35.
The tests to assess IR35 status are very long and complex. But when the practicalities of how a contractor works are considered—e.g can they chose when, where and how to perform their role?—many contractors would fail the no ‘supervision, direction, and control’ requirement.
The duration of many engagements would also act as a red flag to HMRC: we are aware of an instance where a contractor had been working on site for 12 years!
Companies will be much more likely to err on the side of assessing a contractor as being inside IR35 when the consequences of getting this wrong could be a tax liability for them.
What to do?
In short, it’s time to tighten things up, ahead of HMRC imposing a potentially expensive obligation to do so.
The starting point? Understanding who you are engaging and on what basis. This includes the use of temporary workers as well as contractors. Before taking on a worker consideration should always be given as to whether the role being performed is best done by a temporary worker or a contractor, or whether a fixed term employment contract would be more suitable.
As ever, we can help and advise. To find out more, pick up the phone, or email firstname.lastname@example.org
Posted Thursday, March 22nd, 2018 by Warren RylandTweet
Other Articles In This Category
- GDPR: 3 practical questions facing businesses like yours
In just a few months—on May 25th—compliance with the General Data Protection Regulation (GDPR) becomes mandatory. The biggest change to data protection... read more
1st of March 2018 by Warren Ryland
- I'd like to work from home, says an employee. Now what?
Conversations about employees working from home were once very short. In those rare instances where employees did venture to enquire about the possibility, the... read more
8th of January 2018 by Warren Ryland
- Is a domain squatter set to steal your brand?
It’s fair to say that many businesses are unprepared for the new .uk Internet domain - which is unfortunate, as from June 2019, they could find that their... read more
5th of December 2017 by Warren Ryland
- Did you negotiate your last loan agreement - or just sign on the dotted line?
For businesses wanting to grow or invest, external finance can be an attractive option: access to the funds that they need, without equity dilution or... read more
2nd of November 2017 by Warren Ryland
- Protecting the value of your newly-acquired businesses can be a challenge
Buying a business is exhilarating. Hard work, to be sure - but undeniably exciting, and with a rich sense of the opportunities that lie ahead. So perhaps... read more
2nd of October 2017 by Warren Ryland
- GDPR. The clock is ticking: a tough new take on data protection is fast approaching
With effect from 25 May 2018—in other words, less than a year away—your business is exposed to a new regulatory regime backed by hefty fines. And by... read more
6th of September 2017 by Warren Ryland
- Persons of Significant Control: important changes to reporting requirements
It’s barely a year since the introduction of the PSC regime - and already, the compliance requirement has been tightened. And at a time when many businesses... read more
23rd of June 2017 by Warren Ryland
- Avoiding conflict when forming a business: probing questions for potential partners
Every year, several hundred thousand new businesses are created. In 2015, according to the Office for National Statistics, the total was 383,000—the highest... read more
28th of April 2017 by Warren Ryland
- Is your business at risk from the Uber decision? Why your self-employed contractors could really be employees
Fuelled by companies such as ride-hailing business Uber and personal courier firm Deliveroo, the so-called ‘gig economy’ is on the rise. So much so,... read more
12th of January 2017 by Warren Ryland
- The Legal Director - Commended for Innovation in the FT Innovative European Lawyers awards
Law firm The Legal Director (TLD) has been commended in the FT Innovative European Lawyers awards, which were announced at the beginning of this month. TLD ranked... read more
28th of October 2016 by Warren Ryland
- Debt versus Equity - Financing for SMEs
The need for additional finance is often the price of success for small to medium-sized enterprises (SMEs) that are looking to grow. The question that faces the... read more
14th of October 2016 by Warren Ryland
- The deceptive complexity of the Modern Slavery Act
At the end of July, Prime Minister Theresa May launched a cabinet-level government taskforce to eradicate modern slavery in the UK. It was, she said, “one of... read more
31st of August 2016 by Warren Ryland
- How our clients will benefit from the Bar Council's escrow account
Outside the narrow realms of consumer technology, there’s often an inevitable trade-off between cost and quality. In other words, you can have something at... read more
7th of July 2016 by Warren Ryland
- As the net starts to close, the Bribery Act prosecutions begin
As we have written before, the Bribery Act 2010 is a law with undoubted teeth. Fines are potentially unlimited, and custodial sentences can be up to ten... read more
1st of May 2016 by Warren Ryland
- New rules on shareholder identification are now in force
New rules on shareholder identification are now in force - and yet many businesses aren’t aware of them. Does your business have corporate or nominee... read more
12th of April 2016 by Warren Ryland
- First SRA-regulated law firm signs up to Bar Council's escrow account
PRESS RELEASE: The Legal Director has become the first law firm regulated by the Solicitors Regulation Authority (SRA) to sign up to the Bar Council’s... read more
31st of March 2016 by Warren Ryland
- Trade marks: the 3 biggest mistakes to avoid
Wander around a supermarket, or browse the advertisements in newspapers and magazines, and you’ll see trade marks everywhere. And it’s likely, too, that... read more
29th of February 2016 by Warren Ryland
- Avoiding flexible working's hidden pitfalls
You don’t have to look too far to see that traditional modes of employment are increasingly giving way to more flexible working arrangements. Returnee... read more
9th of November 2015 by Warren Ryland
- Are you paying your workers the right amount of holiday pay?
A recent ruling by an Employment Appeal Tribunal is set to cause many businesses a headache. Quite an expensive headache, at that. Simply put, it means that... read more
15th of July 2015 by Warren Ryland
- The Bribery Act 2010: are you running a risk of breaking the law?
To see the difficulties that businesses can get into through bribery - or even allegations of bribery - look no further than the reputational damage suffered... read more
11th of June 2015 by Warren Ryland
- It's official: "Lawyers are not cost-effective"
Imagine, for a moment, that when faced with a serious illness, significant numbers of people took no action. And of those who did take action, around... read more
20th of January 2015 by Warren Ryland
- Could a Shareholder Agreement save your business?
Here at The Legal Director, we’ve recently come across a business where the two co-founders have fallen out -- one is now leaving, in order to set up on his... read more
1st of December 2014 by Warren Ryland
- The high-fee culture that's hobbling British business
Another week, and yet another critical item in the press on the cost of obtaining corporate legal advice. And to be sure, it’s certainly a fairly open goal at... read more
11th of November 2014 by Warren Ryland
- Is crowdfunding the answer to your business's financing challenge?
As the credit crunch and ensuing recession of 2008 began to bite, lending to businesses dried up. To their shock, even long-established, profitable businesses... read more
2nd of September 2014 by Warren Ryland
- Complying with the Data Protection Act: 3 business bear-traps awaiting the unwary
Visit the website of the Information Commissioner’s Office, and there’s an interesting section entitled ‘Enforcement’. In it, the... read more
1st of September 2014 by Warren Ryland
- What might a Legal Audit reveal about your business?
When we start working with a business we assess their existing legal arrangements to determine how these can be improved and aligned with commercial objectives. We... read more
9th of July 2014 by Warren Ryland