Contractors to prepare for incoming IR35 changes following draft legislation
Last week we saw the draft legislation for the off-payroll working rules which are to be extended into the private sector as of 6th April 2020.
As expected for the reform in the private sector, the rules mirror those already in force in the public sector with some small tweaks. The draft legislation will apply to both sectors bringing the policies in line as the ‘off-payroll working rules’ which will pass the responsibility of applying IR35 to the engager.
Small companies exempt
Suggested early on in the reform discussions for the private sector, and confirmed in the draft legislation, small private sector companies will be exempt from applying the new rules. This means that contractors engaged by a company classed as ‘small’ in a tax year according to the Companies Act 2006 will need to continue operating IR35 as they have done for two decades.
If you are unsure if your client is categorised as small, medium, or large, it is recommended to approach your client to ascertain where the responsibility lies as early as you believe your contract will surpass the 6th April 2020.
Having a conversation can also help to discover if your client is aware of the rules and what their plans are should they be classed as medium or large.
‘Status Determination Statement’ required
HMRC introduced a new term in the draft legislation for hiring organisations to provide IR35 decisions, referred to as a ‘status determination statement’.
A status determination statement must be provided to both the contractor and party paying the contractor. It must include both a decision and the reasoning behind the decision. Failure to do so will be seen as a failure by the client to fulfil their obligations, and thus the liability will sit with them until a suitable status determination statement is provided.
This is good news for contractors as it puts some responsibility on the client to provide you with your IR35 determination as quickly as possible. We also believe this may be an attempt by HMRC to try and reduce incentive for blanket decisions, however this may instead encourage complete banning of contractors as reported at HSBC.
Clients must implement a disagreement process
The draft legislation confirmed the client-led disagreement process suggested in the latest consultation. Clients will have 45 days to consider and respond to any disagreements of a status decision brought to them by the contractor or fee-payer, with reasoning behind their decision.
Qdos raised concerns regarding the client-led process in responding to the consultation – clients will essentially be able to withhold their original decision with no further avenue for contractors to dispute it, providing contractors with nothing more than take-it-or-leave-it ultimatums.
Currently, a contractor can challenge HMRC regarding their IR35 status; an appeal can be heard by Alternative Dispute Resolution (ADR) and/or judge at a tribunal hearing. With the client-led process, clients with no previous IR35 experience or in applying case law, and which are unlikely to remain impartial in the process, are the only route contractors will be able to address any concerns.
Prepare for reform
A U-turn at this stage is highly unlikely. Whilst there is very little contractors can do with the new rules being put into place, it is important to be ready for the reform by:
- Speaking with your client as early as possible – for your own benefit in ensuring they have some awareness and understanding of the rules, as well as to ascertain the size of the client organisation and their plans come April.
- Understanding your rights and your client’s obligations under the new rules will help ease the transition as you will know what to expect.
- Collect evidence for your current status, particularly if you are operating outside IR35. You will still be liable for applying IR35 on payments prior to 6th April 2020 and it is yet unclear if HMRC will target contractors whose status changes.
Join Qdos’ Seb Maley and Nicole Slowey, as well as FCSA’s Julia Kermode, for a 1 hour webinar on 25th July at 12pm to get ahead of IR35 changes and understand the legislation from a contractor’s perspective. CLICK HERE TO REGISTER
This article was written by Qdos Contractor, leading IR35 advisory who have been at the forefront of IR35 changes. Qdos have been working tirelessly since reform was announced for the public sector in 2017 in order to prevent blanket decisions and have promoted fair and pragmatic solutions as the only suitable way to manage reform.
So lads, how do we beat the system?
If a bunch of contractors banded together and set up a “small company” to sit between the client or agency, and their respective personal service companies, would this be compliant? (At least for a few years until they talk about closing the “small company loophole”.)
I don’t think it will work.
Unless you are able to provide any one of the group for a project, you will still be providing personal service.
Band together, form a company and provide a complete, remote outsourcing service where any of the team could be working on a project and you have a chance.
Personally I only work remotely, have several projects on the go at one time and try to avoid working on an hourly rate.
Exactly what I do, except the hourly rate. I work from my own office, use my own software and only gonin for design meetings. Problem is companies still ahvent a clue that all this is happening, even when you tell them they look at you like you have a third eye, and still want you on site all the time to monitor your progress. If it ends up becoming really bad I will be leaving the country with my family as staff jobs are just awful both pay wise and I also don’t want to be staff having over bearing idiots talk down to me, had enough of that years ago.
Will IR35 apply to clients who engage UK suppliers/contractors to deliver work for them in the UK where the client has no legal entity?
If your status is determined by the Client to be inside IR35 are they obliged to provide pension scheme membership, holiday pay, sick pay etc.? My guess is they are not. Your own Limited Company can of course provide these but only by withholding some of the taxed and NI paid income, if it even has the right to do so.
My understanding is you won’t beable to use your limited company as the contract is with YOU and the payment company. May as well close the ltd company.
So you become staff with all the benefits??
Supposedly this latest draft legislation also confirms that IR35 will not to be applied retrospectively, i.e. any individuals who begin paying employment taxes after April 2020 will not be targeted by HMRC to repay any employment taxes for previous years.
However, my understanding is that when this legislation was rolled out the the public sector, HMRC took the exact opposite stance and in fact went so far as to demand that clients provide a list of any permanent employees who had switched over from a PSC arrangement prior to the legislation in order to pursue unpaid taxes from these individuals.
Presumably we can take them at their word and they will not be taking this aggressive stance in the private sector come April 2020?
HMRC have always had the right to pursue people for IR35 violations. Why on earth would or should they give those up just because a new law has come into effect. You have, at least in theory, been historically IR35 compliant or not.
What guarentee’s do we have in place that the payment company will pay our taxes.. Many years ago before I went (and why I went) Ltd, Payment companies would go bust and not paid HMRC the taxes they collected.. HMRC went back to the freelancer and demanded by court order the taxes due.
So if Big Company plc engages Joe Bloggs electrician to change a lightbulb do they have to issue a “Status Determination Statement”? Do they need a new statement for each subsequent lightbulb?
Of course!
This is going to destroy the contracting market, agencies (who are mostly a cancer anyway), and have a dire impact on accounting firms when everyone shuts down as I intend to do. Coupled with Brexit, The net effect will be a severe drop in spending over night because HMRC are just too stupid and greedy to grasp the UK is closed for business. Entrepreneurs will avoid this place like a plague
What about overseas companies?
My clients are mostly based in the US. If the UK forces them to comply, they’ll just find another contractor without the burden.
This whole legislation so out of touch.
I think I’ll just move from the UK and be done with it.