The term “IR35” or “Off-Payroll Working” will strike a chord with many, maybe chill the heart of some readers of this article, whether you are a contractor, a hirer of contractors or just a semi-interested party with an eye on the future!
For many years HMRC has tried (with limited success) to tax contractors broadly at the same rates as permanent employees (PAYE) but with none of the perks, security, career development, holiday pay, sick pay, and pension. This legislation is called IR35.
Until April 2017, the legal responsibility to determine whether a contractor was inside or outside of IR35 sat with the contractor. Of course, they also accepted the liability of their decision.
Public Sector – April 2017
In April 2017, HMRC addressed supposed non-compliance in the public sector by introducing a new set of reforms applicable to contractors operating via Private Service Companies (PSCs), whether hired directly or via a 3rd party (fee payer).
Described at the highest level as:
- The legal responsibility to determine whether a contractor is inside or outside of IR35 moved from the contractor to the hiring organisation,
- The tax liability of the determination moved from the contractor to the “fee payer”, which could be the hiring organisation if the hire was made directly or with the agency if hired via a third party (fee payer) i.e. who is paying the contractor,
- To assist in the decision making, HMRC introduced an online questionnaire called Check Employment Status Tool (CEST).
As a supplier predominantly within the Private Sector, we were mostly unaffected by this legislation, although it caught our attention from a “what next” point of view and at a distance, we saw the after-effect of organisations and contractors not being prepared and the negative impact on customer projects as a result of “blanket” inside IR35 determinations made by a large number of Public Sector Bodies (PSBs).
Private Sector IR35
As suspected by many, HMRC moved quickly (and quietly) to start the process of rolling this legislation as “proposed new rules” into the Private Sector with a target date of April 2020.
These ‘proposed new rules’ have been through a final consultation with the draft legislation published on the 11th July 2019 and as we suspected, with little material change from the legislation that has already been implemented in the Public Sector, save some minor clarifications.
What this means for Private Sector organisations who use contractors, and Systems Integrators (SI’s) who use contractors for Private Sector customers, is that you need to have a two-phase approach covering:
- Correct determination of the IR35 status of the current contractor base who will be working with you after April 2020,
- Determine the IR35 status of your new contractor roles before you hire into them.
The Implications of Your IR35 Determinations
By making the correct business determination, there must be an understanding of the implications associated with your decision. For example, if you determine your contractors to be inside IR35, then you must be prepared to overcome the following challenges which could negatively affect the delivery of your projects:
- Retention of the contractors that you already have,
- Attracting new skills,
- Increased cost,
It is widely accepted that a contractor who has previously determined themselves as outside IR35 would be unlikely to continue the same project on an inside IR35 basis without re-negotiating their rate to compensate for their increased cost (tax)… if they decide to stay at all!
The cost of a typical £400 to £500 per day contractor will increase by roughly 21%
Our Oracle Contractors’ “IR35 Contractor Calculator” shows that given some assumptions (PSC retention percentage, etc.), the cost of a typical £400 to £500 per day contractor will increase by roughly 21%.
Conversely, if you determine your contractors as outside IR35, then it is important that you have done that with full knowledge of IR35, as you will be required to provide to the “fee payer” (who accepts the liability). For example, evidence of how you would handle a substitution request, do you control your contractors, how do you remedy unacceptable work… the list goes on!
Help is at Hand — Our IR35 Workshops
At Oracle Contractors, we are preparing our customers for this forthcoming legislation by running physical workshops that aim to gauge your current knowledge levels re IR35, highlight what the changes are and identify which framework your organisation wants to operate within.
From the workshops that we have run to date, most hiring organisation-led “test” determinations have come back as inside IR35, and after further exploration as to the reasons for this (IR35 indicators), we have been able to re-engineer our customers’ business processes and working practices to enable outside IR35 determinations are made with surety.
Be under no illusion: this new legislation is coming, and with the emphasis on decision-making and associated liabilities, you need to be working in a true partnership with your recruitment agency/agencies, and you need to ensure that they have the skills, knowledge and methodology to navigate you through this new and challenging legislative environment.