Upcoming Changes to IR35 in the Private Sector

What is IR35?

The IR35 legislation came into force with the Finance Act of 2000. Its purpose is to determine if contractors are “disguised employees” and therefore liable for full PAYE and National Insurance via deemed salary.

At the end of May 18, HMRC issued their consultation on off-payroll working (also known as IR35) in the private sector. This follows on from the IR35 changes to the public sector that were enacted from April 2017. The consultation is an opportunity for stakeholders to provide relevant insight and recommendations.


 

Recent changes surrounding IR35

Following the introduction into the public sector in April 2017, HMRC claim that IR35 in the public sector increased compliance and the amount of taxes collected. This is the primary driver for HMRC to cast the net wider to further increase tax collections.

The validity of HMRC’s claims is widely disputed by industry professionals and contractors alike. The rules were intended to be applied on a case by case basis but ill equipped and under resourced public bodies meant blanket assessments have been widely reported.

Furthermore, there has been controversy surrounding HMRC’s CEST (Check Employment Status for Tax) tool with many professional bodies, such as the Institute of Chartered Accountants in England and Wales, deeming it not fit for purpose.


 

What was the impact of IR35 in the public sector?

Historically it was for the personal service company to establish whether they were inside (caught) or outside IR35. The changes moved the burden of assessment from the personal service company to the public sector body engaging that personal service company.

Clearly the level of work involved in assessing the status (looking at the usual IR35 indicators) was not a viable option for already stretched public sector entities. This resulted in most bodies essentially deeming everyone inside IR35.

Where a personal service company has been assessed by their customer as inside IR35, the net invoice amount will be subject to PAYE and National Insurance (calculated and deducted by the engager) without the 5% expense allowance normally given for companies caught by IR35.



What will this mean for IR35 in the Private Sector?

It is not yet clear how similar the off-payroll worker in the private sector legislation will be to the public sector rules. Stakeholders responding to the consultation have been stressing the need for caution given the widespread problems with the current public sector rules.

HMRC need to establish how businesses will practicably be able to ensure every single personal service company is assessed on a case by case basis to avoid the blanket decisions in the private sector.

There needs to be further work on the CEST tool to ensure it is fit for purposes, for example it doesn’t currently consider mutuality of obligation which based on recent case law can be the deciding factor in determining IR35 status.


 

Recent IR35 case

Just days before the consultation was released HMRC lost an IR35 appeal case brought by Ian Wells. Wells was a business analyst providing services though a personal service company, Jensal Software Ltd, via agency Capita Resourcing, to the Department of Work and Pensions (DWP).

The judge ruled that the contract was a contract for services not a contract of service and therefore belonged outside IR35. HMRC unsuccessfully argued that the assignment was inside IR35 due to the fact Jensal did not appear to have sufficient autonomy of the work being provided to the DWP.

The judge disagreed with HMRC’s point on control and further disagreed with HMRC’s interpretation of mutuality of obligation (MOO) – the obligation of an employer to provide work and pay for it.

The fact that HMRC’s CEST tool ignores MOO yet they have just lost a case where it is clear they don’t understand it further contributes to doubts over HMRC’s capability of applying and policing off-payroll working legislation.


ICS Accounting are expert accountants with extensive experience within the contractor market.  For more information on the IR35 changes, as well as any accounting or taxation matters, please contact our New Business team on newbusiness@icsuk.com or call 0800 195 3750.