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IR35 reform has been announced with tweaks, but the main concerns remain

As the Chancellor stood to deliver his Budget speech last week, a great many contractors and businesses serving the UK’s independent workforce held their breath.

After all, this was the Budget in which it had been rumoured Philip Hammond would announce plans to extend IR35 reform to the private sector. And it happened. Towards the end of his speech, the Chancellor revealed that further changes will be enforced from April 2020 and engagers will be handed the responsibility for administering IR35 – a move which will also see them carry the liability.

There was a slight twist in the plot, with Mr Hammond revealing that only medium and large private sector engagers will need to decide the IR35 status of contractors come 2020. Making 1.5 million small businesses exempt seems to be a smart move and one welcomed by IR35 specialists.

But this concession doesn’t change the overall picture. News of further reform was the announcement the vast majority of UK businesses didn’t want to hear. You might argue that it contradicts the Chancellor’s claim that this is a Budget for ‘hard working families, for strivers, grafters and carers.’ Certainly, promises from Mr Hammond to ‘always back enterprise’ and his recurring rhetoric that ‘Britain is open for business’ will be lost on many contractors and the businesses engaging these workers.

Of course, most IR35 experts had predicted reform, and for some time these changes have seemed a matter of when and not if. There was however some degree of relief when the Chancellor said he’d chosen to ‘delay’ reform until 2020, meaning the chaos that would have likely ensued with an April 2019 roll-out can be avoided.

By extending changes, the contracting community feels as though the Government has ignored the evidence that demonstrates public sector IR35 reform is not working. They feel let down by an administration that seems interested in raising revenue by any means possible, even when this results in contractors being wrongly taxed.

But should we be surprised? The past few years in particular have shown the Government suspects contractors of widespread tax avoidance and sees reform to the IR35 legislation as the most appropriate way to combat it. In fact, reports say reform will be the Government’s ‘biggest new revenue-raiser’, and in its first year could earn the Treasury £1.3bn in tax that – according to HMRC – is currently missing.

The document released immediately after the Chancellor’s Budget speech revealed public sector reform, introduced in 2017, has so far brought in an extra £550m in tax and NICs for the Government. So, on the face of it, the Treasury’s plan to raise tax receipts is working. Or is it? With thousands of independent workers placed inside the rules without a fair or accurate status assessment, there’s no evidence to show IR35 compliance has improved – assuming it has ever been an issue big enough to warrant such radical changes in legislation.

So, what happens next? A further consultation will be published in due course, which may result in a few amendments to the practical application of reform, which medium and large engagers are being advised to prepare from now, regardless of the fact changes will not be introduced until 2020. This consultation will inform the draft Finance Bill legislation expected to land next summer.

In addition to this, the Government has said it recognises the diverse needs of the private sector and promised to provide extensive support to help engagers implement the rules. You might recall, HMRC faced huge criticism for offering little guidance to public sector organisations, so any way of genuinely assisting private sector businesses is welcome. This time round the Government will be expected to deliver.

Yet another pledge has been made to improve HMRC’s IR35 Check Employment Status for Tax tool (CEST). The technology’s failings – which became all the more apparent in a court case recently – have not gone unnoticed, and specialists have consistently voiced concerns that it has contributed to hundreds of thousands of IR35 assessments. But again, action speaks louder than words and the sector will want to see dramatic improvements.

With changes on the horizon, the onus is now on medium and large engagers – those with either a net turnover above £10m, a balance sheet total over £5.1m or more than 50 employees – to get to work.

The consensus is that while reform is a short-sighted tax cash grab from the Government, it can be dealt with. This is not a reason to panic, nor a reason for private sector engagers to start making risk averse and blanket IR35 determinations. It is a time to prepare for ‘manageable’ changes.

In his Budget speech, Philip Hammond declared the ‘economy is back on its feet again’ and it is ‘an economy working for everyone.’ With IR35 reform now confirmed, the Government is under pressure to make sure these words ring true in the coming years.

By Qdos Contractor

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14 thoughts on “IR35 reform has been announced with tweaks, but the main concerns remain”

  1. Chris

    Does this mean that, as suppliers, we will no longer need get our contracts reviewed for IR35 compliance as the burden and risk of doing so will fall on the engager? Should we expect engagers to provide us with assurance that our contract is outside of IR35? And if HMRC subsequently decides otherwise, will we then be liable for the tax burden (as we are now) or is there some way of transferring that to the engager?

    • KGD

      Yes, once this legislation comes into effect there will no longer be any need for contract reviews or IR35 insurance since the consequences of getting it wrong will no longer fall on your shoulders (providing you only provide services to medium or large companies).

      Obviously this slight saving won’t offset the money you will lose from being put inside IR35 on most of your contracts, but it’s something I suppose….

      As another person has said, larger companies could try to get around this legislation by setting up small shell companies for contractors to work through. You would need to be mindful of this and check if this is the case, as then the liability for any IR35 issues would then fall back onto your company.

      I suspect umbrella companies will be the big winners in this as contractors begin to see little point in operating through a limited company. I went permie a couple of years ago, but if I ever go back to contracting I think I’ll find it hard to justify going down the limited company route again.

  2. Had Enough

    So tax is the answer to everything, as the short sighted western governments, IMF and the like choose to think. How about reducing the tax burden and reducing the burden of expensive government.

  3. Eddy Jawed

    I guess large and medium sized engagers will have to produce little ‘mini baby’ engagers to combat this IR35 taxation theft. A large company may therefore have a smaller IT company full of 49 contractors working for it.

    IR35 taxation on freelance work is pure theft. You can’t arrogantly dismiss serious concerns about missing holiday, pension and sick pay rights over this lame excuse of unequal pay between them and permanent employees. All the while the tax man himself pocketing the difference. Hammond is a crook

    • BolshieBastard

      It isnt the number of contractors Eddy, it is the number of employees OR turnover OR balance sheet. And good luck with the idea that these businesses will bend over to help contractors avoid IR35 when they are the ones carrying the risk!

      • Eddy Jawed

        “Bend over backwards”?

        Yes they will if they want flexible labour at reduced hire costs. This is in their best interests too.

  4. DJH

    Big Client always want to believe they have 100% control. Just like when you get a Painter in… you want him to turn up on agreed days and paint the walls in the order you want. As a supplier he will generally appease the client when he can, but has the freedom to go to another job if the need arises, or use his skill to decide best order (and technique). I do around 10 months work as a SME for one large client (Bank) and 2 months for other smaller client ad-hoc projects (much of it concurrent) but my large client’s HR will always like to feel they have complete control and it is good business to not burst their bubble, so asking them to decide my company’s Tax based on their biased view is plain wrong (and will be ‘blanket’ determinations). Madness.

  5. steven

    How to lose a million plus voters in one statement, I for sure will not vote conservative again!

    • Bob

      The conservatives have been robbing contractors for a few years now with the increased tax on dividends each year …. I for one am sick of it and stopped voting for them a while back. Don’t think I ever will again.

  6. Concerned

    This should be a good thing. The responsibilities all fall on the fee-payer IF the contract is found Outside IR35.

    I don’t plan to take any contracts that are inside, so that should be fine. Unless…

    If we see nearly all contracts assessed as Inside then there’s an obvious problem – not enough to go round.

    Can we raise rates? Maybe – but if they can get someone to do it for £X then they won’t pay £2X?

    When I spoke to Qdos about this, they said that in the public sector a group of locum (temp) doctors stood up to blanket determinations by refusing to work for the NHS until they reviewed their cases individually – and won.

    There’s unlikely to be any such stand in the private sector with IPSE as the only professional body (they seem happy to have something to moan about so that people feel there’s a need to be in their organisation – which I’m not btw).

    Options seem to be:

    1. Leave engineering/IT.

    2. Take fewer contracts – only Outside ones – and live on less money.

    They can’t tax what you don’t earn.

    ———–
    P.S. I don;t see where people are getting the idea that end clients setting up shell companies can simply transfer the liability back to the contractor. It sounds legally unenforceable.
    Care to quote a reliable source for this?

    • SpreadsheetPhil

      “I don;t see where people are getting the idea that end clients setting up shell companies can simply transfer the liability back to the contractor. It sounds legally unenforceable.”

      If they set up a ‘small company’ to hire contractors through then IR35 doesn’t apply so liability works the same as it is today.

  7. Phil the Pill

    Still a very odd set of assumptions on behalf of the Revenue as they never take account of the increased VAT on personal purchases, Dividend Tax paid, stamp duties paid on the big house we buy etc etc all to plug a notional hole in Employer /Employee NI contributions. Given that HMRC will more than have their hands full post Brexit with other admin tasks this whole thing is destined to crash & burn. At the end of the day this is all the fault of the BBC and their daft payments to their over rated presenters.

  8. Concerned

    Just to add…

    IPSE have mostly demanded “certainty”. Now they have it.

    I warned them about that narrow stance for years – it’s like the stories of making a pact with the devil: you have to be very specific or you get something you don’t really want.

    Being certain that you’re inside IR35 is certainty – but not what was really wanted.

    Now ,if they’d campaigned to abolish Employers NI, that would have been a sure win.

  9. Cornershop

    Did I read somewhere that they will no longer perform retrospective investigations?

    .i.e, i’ve just accepted a perm role after several months on the bench – should I renew my IPSE membership and Qdos insurance packages in January?

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