IR35 rules are coming to the private sector
Mar 12, 2019
Plans are afoot to roll out IR35 rules to the private sector, and it’s safe to say this development is causing much concern and disgruntlement amongst those affected. Here’s a reminder of the background to IR35 rules, and an outline of how the upcoming roll-out may affect businesses and contractors going forwards.
What are IR35 rules?
IR35 has existed since April 2000, when it was brought in to overcome ‘disguised employment’ and to ensure that individuals who worked as freelance contractors via a Personal Service Company (PSC) were paying the right amount of tax and National Insurance (NICs). It was the individual’s own responsibility to prove that they were not caught by IR35 rules, because if HMRC could argue that the PSC was realistically an employee, then he or she would have to apply PAYE to their earnings.
IR35 rules in the public sector
Due to perceived issues of non-compliance, in April 2017 the government introduced new rules which now transfer the responsibility of making decisions about IR35 from the individual PSC to the public sector body who engages them. In many instances the PSC may be employed via an agency or third party, and it is therefore the agency which is now liable to decide about IR35, seeing as it is the agency which pays the PSC his or her earnings.
For simplicity’s sake, and to avoid challenges from HMRC, many agencies operating in the public sector have taken a blanket decision that all PSCs are caught by IR35 rules. This means that they are therefore paid net of tax and NICs. As a result of this many contractors have closed their companies and became umbrella employees, or left the public sector and moved to the private sector instead.
IR35 rules in the private sector
Despite the unpopularity of IR35 amongst public sector workers, the government has made it clear that the same changes to IR35 rules will be rolled out to the private sector. Private sector businesses have been granted a 12 month reprieve, but in April 2020 they too will become responsible for IR35 checks amongst their workers. Understanding and implementing the legislation will take significant resource within businesses, and contractors may choose not to accept or renew engagements because their roles are deemed to be caught by IR35 rules and they’ll end up paying more tax.
Which businesses are affected?
The good news for those small businesses in the private sector who are end-users is that IR35 rules will only apply to medium and large enterprises, similar to their definition in the Companies Act 2006. Small businesses with a turnover below £10.2 million, a balance sheet total of no more than £5.2 million or fewer than 50 employees will not be affected by the change in rules. So if a small business engages temporary resource on an off-payroll basis, then it is still the individual contractor who is responsible for checking his or her own IR35 status. Only those contractors who choose to work for medium or large businesses will find their IR35 status checked by their engager.
Check employment status for tax (CEST)
If you are unsure whether you, or your engaged contractor, are caught by IR35 rules then you can check your status using HMRC’s online tool – dubbed CEST. HMRC has been heavily criticised for the inaccuracy of CEST, but is looking at ways to improve the tool presumably in time for the private sector roll-out.
HMRC has recently opened a new consultation on off-payroll working in the private sector which is due to run until 28 May 2019. Further information should be available after this date, but in the meantime if you have any queries about IR35 and whether it applies to you then do please contact us and we’ll be happy to help.