IR35: reform extended to the private sector

How Prepared are you?

The IR35 “off-payroll” rules are being extended to encompass all those working in the private sector, starting with payments made after 6th April 2020. This will require you to review your working arrangements for periods after that date and to consider what you did in the past.

Your ability to influence the former and manage the latter will be compromised and the sooner you act the better.

Here we focus on the mechanisms around the determination of the role and the interaction between the parties. We will consider protecting the past in later notes.

The Private Sector Change

“Off-payroll” rules have been in place in the public sector since 6 April 2017. D-day for the Private Sector roll-out is 6 April 2020.  From that date the end client will be responsible for determining whether the role falls inside or outside IR35. This start date has a sting.

HMRC’s published guidance claims that the legislation will apply to contracts entered into or payments made on or after 6 April 2020.  Even if your contract finishes in March 2020, if you do not receive payment until June 2020, the legislation will apply. If the role is deemed to be within IR35, tax and national insurance contributions are required to be paid – by the fee payer – at rates equivalent to an employee.

For contracts starting after the trigger date, the end client will determine whether the role is to be inside IR35. The end client is required to prepare and distribute “Status Determination Statement” (SDS) to the fee payer and worker.  This is their statement of the decision made by them as to IR35 status. The legislation is silent on what the end client must consider, and the degree of due diligence required. Whilst HMRC hope that vigorous checks and consideration of the facts will occur, there is no means to check or police this.

There is a requirement to prepare and distribute the SDS within 42 days of the contract start date. Until then the end client is responsible for Tax and NIC which may be due.

If your role is inside IR35, the fee payer, usually the agency or intermediary closest to you, becomes responsible for paying tax and NIC from the funds that pass through their hands. If they do not, that liability falls back to the agency working with the end client. Failure there means that the end client becomes liable.

What should I do if I disagree with my end client’s determination?

Some major engagers of contractors have made policy decisions that all off payroll roles will be deemed to be inside IR35. HSBC, Morgan Stanley and M & G Investments, have made public statements to this effect. Other organisations are now doubt reviewing their position. The lack of time before these rules begin makes taking a “blanket approach” to reduce financial risks attractive to many. Unfortunately, HMRC has vacillated on this and will not say that this one size fits all application is outside both letter and spirit of the rules. Many end clients will take this easy way out.

If your end client determines that the role falls within IR35, but you (and/or your agency) do not believe it should be, the legislation provides you with an opportunity to appeal the decision – to the end client.  This “client led disagreement process” is an opportunity to put forward your case. How this will work in practice only time will tell but it is unlikely to be something contractors will feel comfortable doing, especially if they have a rapport with the end client.

To make the appeal you are required to make representations on why you believe the decision is wrong.  The end client then has 45 days to tell you either:     

  • The original determination is upheld; or
  • Give you a new status determination.

If the end client fails to respond within 45 days, the liability for tax and NIC reverts to them.

A subtle balance

Challenging an end client is not something to be undertaken lightly. That end client will have either been diligent about their responsibilities, undertaken a full investigation and reached a logical decision, weighing all factors and being neutral in terms of internal pressures. Or they will not. They may make partial decisions influenced by their own motives.

Your agency – and the end client’s equivalent – will be concerned that an “inside” role will severely reduce their income. They cannot always be relied upon to assist the end client in reaching the right decision on the facts. They are also in the firing line for liability and we are already seeing them change contracts to shift this to contractors.

What is best for you? An outside IR35 role will put more money into your hands initially but with fewer contractors to investigate and better tools, HMRC will be undertaking more status reviews. Getting the decision right and having contemporaneous evidence is critical if you are to be protected. There is also the question of whether you really want to challenge the end client decision. Will doing so limit the chance of the contract being completed or renewed?

We believe that an independent arbiter is required here. One who can objectively balance the hundreds of elements in play and reach a position that all can live with. Some of these are well know already. Others will emerge with varying degrees of independence and competence. Some will no doubt promise much, knowing that by the time an investigation is launched, they may be reincarnated elsewhere (we’ve seen this happen in the sector – a lot).

Temporary relief

Contracting is going through a revolution. Turbulent times lie ahead. It will be perhaps 2 or 3 years before we see this settling.

It is worth considering whether using a compliant umbrella – one deducting full PAYE – is the solution – at least for the time being.

Next steps

Start the discussion with the end client now. Consider carefully what value the agency brings and be prepared to make an objective decision about that. Look at the situation with fresh eyes because a lot of the myths of the past are just that – myths. Think hard about not only your present contract, but also the next one and probably the following 4 or more.

The game has changed. HMRC has changed the rules; changed the referee; changed the ball; changed the scores and moved on. The choices are 1) wishing that this had not happened or 2) grasping the opportunities and moving on.