HMRC, Policies and Procedures

Preparing for IR35 in the Private Sector

If you employ contractors or freelance staff for your business, you will have heard of the upcoming change in IR35 legislation affecting the private sector. 

In short, from April 2020 the due diligence measures on a contractors taxation methods will be the responsibility of the hiring organisation.  HMRC describes IR35 as:

“The off-payroll working rules (commonly known as IR35) ensure that individuals who work like employees pay broadly the same income tax and national insurance contributions (NICs) as employees, regardless of the structure they work through. The rules do not affect the self-employed.”

Noting that:

The responsibility for determining whether the off-payroll working rules apply will move to the organisation receiving an individual’s services. Put processes in place to determine if the off-payroll rules apply to future engagements. These might include who in your organisation should make a determination and how payments will be made to contractors within the off-payroll rules.”

Currently IR35 is only in force for public sector employees and is gauged using a question set called CEST (Checking Employment Status for Tax). 

The CEST tool is often maligned as being a poor test of employment status – generally referred to as not fit for purpose.

HMRC are reported to be updating the tool, but there has been no visibility on these changes as yet. The rapid introduction of IR35 into the private sector is leading to considerable lobbying from contractors and third companies whose income comes from the contractor industry.

However, HMRC has not conceded any changes and is unlikely to in for the foreseeable future. In fact, the government has recently praised the effectiveness of the introduction of IR35 in the public sector.

All this leaves hiring companies in a difficult position. A handful of large companies have effectively stated their procedure will now be a blanket “inside IR35” status for contractors.

This knee jerk reaction by larger companies is consistent with current “semi-public” industries such as education that automatically classify this way already.

However, these larger organisations are able to absorb higher day rates from contractors to limit brain drain – especially in the IT sector.

For smaller and mid-range companies, IR35 can be more daunting.

As well as a considerable administrative overhead from CEST checking  – there is the additional cost of processing inside IR35 taxation. 

So, will private sector IR35 lead to the end of contracting in small to midsize companies?

Will contractors start to be classified as inside IR35 in the majority of cases? 

Other scenarios are contractors company shapes may change. For example, running multiple contracts at the same time. This is a practice that is quite common at the moment – or pooling resources with other contractors, forming multi-person companies rather than the traditional 1 director PSC (personal services company).

While we wait and see what the future holds for IR35, we can assist with any IR35 policy and procedure writing and reviewing – please contact us if you would like more information.

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+44 1244 342 618