Earlier today, as part of The Budget, Philip Hammond announced that the IR35 reform would be rolled out to large and medium-sized businesses in the private sector in April 2020. Ahead of the Budget announcement, ATA had been speaking with our clients to ensure they felt fully prepared for any possible outcome.
Now that we have a better understanding of the timescales of the IR35 reform within the private sector, there are a number of questions end-clients should be asking themselves in preparation. But first, let’s go back to basics.
What is IR35?
IR35 is a legislation that was implemented in April 2000 to reduce tax avoidance. Prior to IR35, permanent employees were easily able to establish themselves as a limited company and significantly reduce their tax payments despite no change in their position. These individuals are labelled by the HMRC as disguised employees.
Despite being aimed at those purposefully manipulating the system, IR35 also has an impact on those who genuinely supply their services to a client through their own limited company. A contractor working through an intermediary must remain ‘self-employed’ in the eyes of the HMRC at all times, otherwise be deemed as inside IR35 and so liable for the same tax of that of a permanent employee – they would also be liable for the tax bill of their deemed employer.
What’s changed in the public sector?
Since the implementation of IR35, the responsibility of determining IR35 status fell on the contractor and their limited company would be liable for any tax and penalties. This all changed for the public sector during the April 2017 reform when The Government announced that this liability would now fall on the hirer.
The reform requires businesses to implement more robust compliance and administrative processes to ensure their contractors fall outside of IR35 – failure to do so can result in significant tax risk and penalties. The most notable legislation changes from that reform are:
• The hirer must now carefully assess the contractors they engage with or risk additional costs
• Recruitment agencies are required to calculate and process tax via PAYE (Pay As You Earn) on each payment made to a contractor who is caught by the IR35 legislation
• If there is no recruitment agency involved, the responsibility rests with the direct hirer
These legislative changes have caused significant disruption to the public sector and following the announcement today it’s likely that we will be facing a number of the same challenges within the private sector.
What effect is the IR35 reform likely to have?
We asked Dave Chaplin, an active IR35 Lobbyist for Contractors and CEO of Contractor Calculator, his thoughts on the impact of the IR35 reform to the private sector. Dave said:
“Rolling out the new off-payroll reforms to the private sector would result in the largest upheaval in the contract market since the original IR35 in April 2000. All firms that engage contractors will have a considerably large compliance task ahead of them, as they will need to assess every existing contractor on a case-by-case basis as soon as they can and manage the changeover to minimise disruption to their business.
The considerable risk ahead is for firms that are engaging contractors who they subsequently assess as inside IR35. All of those contracts will require renegotiation, and it’s very likely that contractors assessed as inside IR35 will seek work elsewhere, rather than accept an inside IR35 status and the historic tax risk that accompanies it. This will then involve hiring replacements who will charge considerably higher fees if the contract is inside IR35.
To put in perspective the challenge ahead, imagine the response by your employed workforce if you told them they were all going to get a pay cut of up to 20%, and that it could be retrospective. It’s for that reason alone that preparations need to begin right now.”
10 questions you should be asking as an end client
Whether you’re working directly with ATA Recruitment, any other recruitment business, or even just engaging with contractors directly, you need to be considering the following things:
• Are you able to identify all of the PSCs delivering services to your business?
• How are PSCs currently engaged? (Via agencies or directly)
• How do you currently manage IR35?
• Do you treat PSCs differently from a permanent employee?
• Have you considered the potential financial impact of IR35 to your business?
• Do you have a robust compliant supply chain?
• Would your business be able to cope with the peaks and troughs of projects without the ability to hire contractors?
• Would your staff be prepared for the increased administrative burden?
• Would your business remain competitive in your marketplace if you were not prepared for the IR35 reform?
• How would your business cope if your contractors left and went to your main competitor?
Our compliance operation
ATA Recruitment has long been recognised as one of the most compliant recruitment agencies in the market. Working alongside our trusted legal partner, ATA can complete risk assessments on your current workforce. We can help to implement processes to ensure your business is in a position to take reasonable care when assessing a contractor’s status for IR35. The benefits of doing this include:
• Protecting your business
• Remaining compliant
• Remaining competitive
• Still being able to attract the best talent to your business
• Avoiding challenges to blanket assessments
The fact that the IR35 reform is not being rolled out until 2020 allows you time to get ahead and start preparing early, to minimise disruption to your business. We strongly recommend that you do this.
Email us at email@example.com or call 01332 861 657 for further information about the IR35 reform and it’s impact on your business.
For more information on IR35 and a wealth of contractor resources, visit Contractor Calculator.