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Contractors Firm News IR35 Tax Planning

IR35 Reform in the Private Sector

 

Guest article by Nicola Smith, Fairford Tax Consulting

Following the reform to IR35 in the public sector in April 2017, it was almost inevitable that we would see such reform in the private sector at some stage in the future. The recent Budget has confirmed that date to be April 2020.

There had been suggestions that the legislation to bring the private sector in line with the public sector could be introduced in April 2019. So, while the delay may come as relief, now is not the time to sit back and take a breath. Now is the time to act.

What we know, but more importantly what we don’t!

What we know from the Budget, and the related documents, is that the responsibility for determining whether the off-payroll/IR35 rules apply to a relationship will move from you, the contractor, to the client with effect from April 2020 in respect of all engagements, subject to the exemption mentioned below; and that the entity paying you, whether it be the client, agency or other third party, will be responsible for the deduction of tax and NIC if the client deems the relationship inside IR35.

The reform is intended to bring the private sector rules in line with the public sector rules. This, in
itself, causes concerns given the problems that have been reported since the reform in the public
sector last year, including but not limited to, clients making blanket decisions that contractors are ‘inside IR35’, and the fact there is no process for you to appeal a decision of ‘inside IR35’ if you disagree.

HMRC has acknowledged these concerns in the recent consultation response, however, with no guarantee April 2020 will see a change to the legislation currently operating in the public sector, we cannot assume the same issues will not arise when the legislation is introduced for the private sector.

Furthermore, it would, in my opinion, be a mistake to wait until we have any certainty.

According to the consultation response issued on Budget day, the Finance Bill will not be published
until Summer 2019. Until this time, there will be no certainty of what changes, if any, will be made to the current form legislation. Leaving only a few months before the new rules take effect.

Not only does this give limited time for clients to review its relationships with contractors and get to grips with the legislation, assuming there is no contractor right of appeal of an ‘inside IR35’ determination, it provides little time for you to discuss your views of the relationship with the client.

For these and the other reasons highlighted below, I would strongly suggest you open dialogue with your clients and prospective clients now in respect of your IR35 status.

There are further fundamental issues raised by the announcement, deeming it necessary to open the lines of communication with your clients now and continue with your own due diligence in terms of IR35, such as ensuring you get your written contracts reviewed. Or indeed, get written contracts in place if there are none.

Exemption for small organisations

The government has announced that small organisations will be exempt from the changes proposed for April 2020. Meaning that contractors engaged in contracts with ‘small businesses’ will remain responsible for determining IR35 and not the client. The criteria determining a ‘small businesses’ for the purposes off-payroll in the private sector is expected to be similar to the definition in the Companies Act 2006. At present the criteria is:

• Turnover not more than £10.2 million;
• Balance sheet not more than £5.1 million; and
• No more than 50 employees

There are various issues arising from this, including potential changes to Companies Act 2006 definition following Brexit.

On a practical level, it requires you to know, or find out, whether a client or potential client is a ‘small business’ in advance of April 2020 and then going forward in advance of every contract for you to 1) determine who is responsible for making the determination in respect of IR35 and 2) to make a decision whether or not you wish to take on a particular contract if the IR35 decision is taken out of your hands.

Furthermore, this is only likely to be a temporary exemption while everyone gets used to the shift in responsibility.

Much like the inevitability of off-payroll reform in the private sector following April 2017, it too seems inevitable that the exemption will be lifted at some point in the future.

CEST

There have been significant concerns raised about HMRC’s Check Employment Status for Tax (CEST)
tool, which is intended to provide guidance to clients in determining employment status for the
off-payroll rules.

One of the most fundamental issues stems from HMRC’s interpretation of mutuality of obligations
(MOO), which is that it exists in every contract. This is reflected in its guidance, the arguments put forward in recent IR35 tribunal cases and, in my experience, the way they are approaching IR35 enquiries generally.

This view is contrary to the binding case law precedent, which determines that MOO, together with a requirement for personal service and sufficient control, are fundamental factors determining employment status.

HMRC’s interpretation of MOO is not only at odds with case law, unless there is a policy change by
HMRC’s in respect of its interpretation of MOO, it is difficult to see how CEST can be effective in assisting anyone determine employment status for the off-payroll rules.

For this, and the other reasons mentioned, it is therefore important that you open a dialogue with your clients now.

While medium to large business are likely to have their own advisers/legal teams you should bear in mind that many private sector clients will, to date, have had little reason to know how the individual providing services to them is ultimately engaged or necessarily have any real exposure to IR35. Ordinarily the client is merely looking for a qualified resource and as such this change will be a significant undertaking for the client. Do not allow the blanket decisions we have seen in the public sector affect you.

Act now

Do not leave it to HMRC to provide guidance to your clients, particularly when it is clear HMRC’s current guidance does not reflect binding case law. Discuss, and where possible assist and support your clients with determining your IR35 position so that everyone is prepared for April 2020, by providing your view of the relationship and if necessary putting the clients in touch with your accountant and/or
specialist advisers. Once the rules are brought in, and assuming they mirror those for the public sector, you may have little chance to appeal an ‘inside IR35’ decision. The commercial and financial impact on
your business could be substantial.


About the Author

Nicola is a specialist advisor to Meades Contractors for all matters relating to IR35. She provides training for our client managers  and guidance in more complex contract reviews. Learn more about Nicola’s work at www.fairfordtaxconsulting.co.uk