From April 2020, businesses in the private sector will become responsible for determining the tax status of its contractors to ensure they are IR35 compliant. This follows similar changes introduced in the public sector in 2017. Here we assess the impact of IR35 reform on the public sector and look ahead to what companies can expect when the rules change next year.
IR35 legislation was introduced in 2000 to address the concern surrounding disguised remuneration and the use of personal service companies (PSCs) to facilitate this. At the time, compliance with the legislation was the responsibility of the contractor. In the event that a contractor was considered to be an employee by HMRC, the additional liabilities would be borne by the contractor, putting all of the onus on them and providing the end client/employer with no real risk in taking them on.
Establishing whether you were caught by IR35 generally involved assessing how many pointers applied to your working relationship. These assessment pointers include:
- Control – how much influence does the client have over you i.e. how you complete tasks
- Substitution – your right to provide a substitute if you are unable to work
- Mutuality of Obligation – your client expects you to work when asked and you expect to be provided work and paid regularly
- Equipment – do you use your own equipment or is this provided by your client
- Payment – are you paid per task or regularly
- Part & parcel – how integrated are you into the organisation i.e. attending regular staff meetings or company functions
- Paymasters – how many clients do you work for
- Exclusivity – are you allowed to work for multiple client
HMRC didn’t provide any guidance as to whether a certain amount needed to apply or if any held more weight than others, preferring to cite the adage of ‘each case would be decided on its merits’. This ambiguity led to a number of cases where IR35 and its application has been debated, each one altering people’s perception as to when it applies, with even HMRC unsure itself. See our full IR35 Report for more details on these cases.
Significant changes for the public sector
In 2017, this uncertainty became the problem of public sector bodies as new legislation switched the responsibility for ensuring a working relationship was IR35 compliant to the client rather than the contractor. Good news for contractors right? Well no. The increased risk for public sector organisations coupled with a lack of guidance from HMRC and the additional time burden of assessing individual contractors has led to blanket role-based assessments being made which has led to a lot of contracts being lost and compliant contractors unnecessarily losing positions.
Research undertaken last year by The Association of Independent Professionals and the Self-Employed (IPSE) and the Chartered Institute of Personnel and Development (CIPD) found that, after speaking with 867 contractors and 115 managers, as a result of the IR35 changes to the public sector:
- 51% of public sector hiring managers had lost skilled contractors;
- 71% struggled to hold onto existing contractors;
- 52% had witnessed cost rises, delays and project cancellations;
- 75% felt it was now harder to recruit contractors.
The CEST tool
Just before the public sector changes came into force, HMRC released its Check Employment Status for Tax (CEST) tool to help organisations and workers determine if they were caught by IR35 or not. However, the tool has received significant criticism. One of the biggest issues identified is that the CEST tool doesn’t include a mutuality of obligation question which has been integral in establishing an employer/employee relationship. HMRC decided to assume that it existed in all contractual relationships which many commentators deemed to be unfair.
HMRC has announced that it will launch an updated version of the CEST tool at the end of 2019 but with more significant changes coming in April 2020, this leaves little time for testing.
What can the private sector expect?
Neither clients nor contractors in the private sector will take comfort from the roll out of IR35 reform in the public sector. Whilst small companies are exempt (see our full IR35 Report for more details), medium and large companies are facing significant changes to their working practices to avoid IR35 breaches and the impacts are already being felt.
At the end of August, HMRC sent letters to pharmaceutical giant Glaxo SmithKline (GSK) and 1,500 contractors in its IT and biomedical sciences departments that they were working outside of the IR35 rules. The irony of the situation is that HMRC could have in no way have reviewed these individual contractors’ contracts and actual working practices.
Following this news, Barclays announced in early October that it intended to shift its entire contractor base to employees and from 1 January 2020 new contracts will only be on a PAYE basis. Similarly, Lloyds have already started having one-to-one discussions with contractors to inform that they have no plans to renew PSC contracts beyond the reforms implementation date of 1 April 2020, and HSBC and Morgan Stanley are understood to have told all its contractors they will need to become full time employees or cease working with them.
With still more than five months before the changes become law, it appears clear that companies are looking to abandon using the IR35 structure to avoid any challenges from HMRC. This is ironic considering HMRC’s less than stellar recent track record in IR35 cases, with just 1 win out of 8 cases in the last 2 years. With cases indicating that bodies/companies applying blanket decisions are wrong to do so, it will be interesting to see if any contractors seek to disagree with these decisions, citing a lack of ‘reasonable care’ taken by companies in reaching their decisions.
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