I’ve said for some time that it is a matter of “when, not if” that the IR35 reforms applying to the public sector are extended into the private sector.
In this time, we’ve seen the Matthew Taylor report into modern working practices, a government consultation into tackling IR35 non-compliance in the private sector, and speculation about extending the rules in the normal round of pre-Budget leaks.
Therefore, by the time the Chancellor announced these changes in yesterday’s Budget speech, it was no real surprise. However, there were some small unexpected details that should largely be seen as positive news to the private sector even if the overall policy announcement may not.
Public sector – challenges and lessons learnt?
Although the draft legislation is yet to be published, we are broadly expecting the rules for private sector employers to mirror those introduced into the public sector with effect from April 2017.
These rules put the obligation to assess IR35 onto the ‘end user’ (the organisation to whom a contractor operating via a Personal Service Company (PSC) delivers their services) where they are a public sector body. IR35 status is then assessed via the normal, vague employment status tests for tax purposes built on many years of case law. Where this deems the contractor to be an employee then the ‘fee payer’ (either the end user or often an agency) must operate PAYE on payments to the contractor and their PSC.
For completeness, please note that IR35 itself is not a new concept but previously the obligation and risk sat with the contractor and their PSC. What the Government have effectively done is moved that obligation and risk to the end user organisation, along with the potential additional cost of employer’s National Insurance Contributions at 13.8%. HMRC have previously found it difficult to police IR35 by tackling each individual PSC and thus have moved a large part of that burden onto employers.
One of the ways in which HMRC have arguably done a disservice to employers struggling with the new rules is by touting their Check Employment Status for Tax (CEST) tool as the magic bullet. You can read more about the limitations of CEST in one of my previous articles: http://advisory.grantthornton.co.uk/post/102euwv/hmrcs-ir35-tool-not-fit-for-purpose
It’s fair to say the public sector has struggled with the new rules, leading undoubtedly to non-compliance which will be discovered further down the line. Some employers have even taken an overly-prudent approach of putting all contractors onto the payroll, which is not strictly applying the legislation correctly, is unnecessarily costly, has resulted in disputes with agencies and, ultimately, a loss of talent by way of some contractors voting with their feet and refusing to work with the public sector. None of this bodes well for a challenging and cost-pressured sector so fundamental to the UK socioeconomically.
Private sector – some good news but further clarification needed
Whilst all the same challenges will need to be faced by private sector employers, the first piece of good news is that they have until April 2020 to prepare. Prior to the Budget, there was speculation that this would be April 2019 and possibly even with immediate effect. Given the short lead time that the public sector had to prepare, it is perhaps some consolation to see that the Government has learnt from this.
The other relaxation in the rules is that these will only apply to large and medium private sector employers. Although this fails to completely level the playing field as some employers and contractors will be outside of the scope of the IR35 changes, it must come as welcome relief to smaller employers that may otherwise struggle to comply with complex legislation and attract individuals with the skills necessary for smaller, more agile businesses.
However, we must await clarification regarding how a small employer will be defined for the purposes of being out of scope of the new rules. There is already speculation that this might be defined as fewer than 50 employees, which begs the question of how this itself is defined if a business has a high number of contractors that should be considered employees under IR35! Alternatively, we may see a turnover or gross assets test or a combination thereof.
Ultimately, we will need to wait for the draft legislation for confirmation.
In the meantime, it's important to remember that contractors engaged directly (i.e. not via a PSC or agency) are also subject to the normal employment status tests. Additionally, overseas PSCs / agencies could pose a risk due to other legislation which can transfer a UK PAYE obligation to the first UK entity in a contractual chain.
The first step for private sector employers is to understand if they will be within scope of the new legislation. For many, this will hinge on the definition of small employers.
Next, understanding the extent, if any, by which an organisation is impacted will be crucial. Large employers in particular often don’t have clearly defined responsibility and processes for engaging contractors so it can be challenging to gain full visibility of the status-quo. Working through the complex and often ambiguous area of employment status for each contractor and how this will be monitored going forwards is then no mean feat.
At Grant Thornton, our approach is to build on our the good work we’ve already done with the public sector on IR35, to draw on experiences across our client base and the ways in which we have best been able to assist them with the challenges, including:
- IR35 Readiness Check – review of contractors, processes, costs and recommended actions;
- Training staff on the new rules;
- Helping communicate the impact of the changes to contractors and stakeholders;
- Access to specialist advice via our IR35 Helpline; and
- Fully outsourced IR35 assessment and ring-fenced payroll service.
Please get in touch if you would like to discuss this further or for a copy of our IR35 brochure.
More details about employment status and IR35 can be found on the Grant Thornton website: https://www.grantthornton.co.uk/en/services/tax/employer-solutions/employment-status/
Associate Director, Head of Employment Taxes & Payroll, South
0117 305 7787