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IR35 to be rolled out to the private sector.

In October’s Budget the chancellor revealed the ‘worst kept’ secret that the current IR35 rules which apply for public sector contracts are to be rolled out to the private sector from April 2020.

This will mean that the ‘employer’ will be responsible for assessing the contractor’s employment status and potentially must deduct tax from the contractor’s pay, as well as paying employers’ NICs.

HMRC estimates the original reforms have raised £550m in income tax and NICs in its first year. It is also happy that ‘evidence suggests compliance has improved since the reform was introduced in 2017’.

Uncertain times ahead?

It’s important to remember that behind the headline there is still a lot of uncertainty:

  • the revised IR35 rules will not apply where the contractor engaging business is ‘small’. But helpfully HMRC does not define what it means by small. Presumably this will be left until after the consultations have finished
  • in order to determine the status of the individual, HMRC has developed the Check Employment Status for Tax (CEST). But as we all know this tool is subjective and has been subject to criticism and various tribunal cases in the past. Under the Freedom of Information Rules HMRC released a summary of its own testing on CEST which revealed that in 2 of the 24 cases, CEST returned a different decision to the First-tier Tribunal, which HMRC did not appeal.

Because of the clear problems with the existing CEST HMRC has stated that it will continue to work with stakeholders to improve further CEST and guidance before the reforms comes into effect.

Potential effects of the changes

  • the employer may not have the time or the knowledge to make a proper assessment and so contractors may be incorrectly treated as IR35
  • currently there is no formal right of appeal to the assessment decision so contractors have little ‘right of reply’
  • many large companies rely on sub-contractors so making early arrangements to implement the new rules is essential, with an inevitable increase in costs to them
  • it may lead to contractors abandoning limited companies as a business vehicle which will mean tax and compliance issues for them.

Further information

A further consultation on the detailed operation of the reform will be published in the coming months. This consultation will inform the draft Finance Bill legislation, which is expected to be published in summer 2019.

Full details of the budget announcement can be found here.

ACCAs technical insight into the history and definition of IR35 is here.

Article from ACCA In Practice