More than six months after the introduction of off-payroll reform in the private sector, Director of Strategic Sales at Parasol Group, Clarke Bowles, delves into some of the lessons learned from the changes to IR35 and weighs up what might happen next.
The off-payroll reforms to the private sector introduced in April this year caused a chain reaction in the contractor community, with many companies completely rethinking their hiring strategies and policies. Yet still, we’re continuing to see the impact these changes have had on the contracting industry. In this article, I’ll focus on the major developments so far and explore the action the government may take moving forward.
IR35 reform – what is it?
Let’s start from the very top. As many of you will know, IR35 was introduced in 2000 in an attempt to differentiate a contractor who is in business on their own account from an employee and therefore ensure the correct tax is being paid.
If a contractor is answerable to someone within the end hirer organisation (in most contractor cases, ‘the client’), expected to work a set number of hours on certain days and is not able to substitute themselves for someone else to fulfill the role, it’s likely they would be classed as inside IR35. As a result, that contract will be subject to PAYE.
For genuine contractors who work on multiple assignments across various firms, organise their own schedules and are genuinely in business of their own accord, their assignment is likely to be deemed outside IR35. However, each contract should always be assessed individually on its own merit.
The changes to IR35 introduced in April this year mean that medium and large private sector businesses hiring personal service company contractors (PSCs) are now responsible for determining the IR35 status of each assignment and will need to take reasonable care to assess the contract and working practices. The private sector changes mirror those rolled out in the public sector in 2017.
More than six months into off-payroll reform, however, and there continues to be confusion around these changes, with many organisations struggling to correctly identify the IR35 status of contractors.
Status Determination Statements (SDS)
For increased clarity on the IR35 assessments, the end client must detail their determination within an SDS. Until the SDS is passed, the end client carries the tax liability irrespective of whether they are the fee-paying party.
To help inform their decision, end hirers should consider things such as;
Control – the end hirer should not have the same level of control over the contractor as they would of a typical employee to maintain outside IR35 status.
Substitution – being able to substitute in a qualified alternative to complete the role may indicate that the assignment falls outside of IR35.
Mutuality of Obligation – if the end hirer is expected to offer work to the contractor and an obligation for the contractor to accept this. In this instance, the contractor could be deemed inside IR35.
However, it is important to understand that rarely (if ever) will a single factor determine whether an assignment falls inside or outside IR35. A holistic overview of all of the facts is needed to determine the correct status.
Do not hang your hat on ‘flawed’ CEST
In recognition of the potential difficulties around determining IR35 status, the government developed the CEST tool to provide something of an indication. But this has proven to be flawed, as we have seen several government departments incur significant tax bills from HMRC after using CEST following public sector reform in 2017.
Despite HMRC saying that they will stand by the results of CEST, (which is often the motivation for many end hirers opting to use the tool), the tax office has refused to do so on multiple occasions, claiming that the information was not submitted correctly. A recent case involving an £87.9m bill for the Department for Work and Pensions is just one example of HMRC discrediting the status determination issued by CEST.
True, CEST can be a helpful tool for gaining an indication as to the IR35 status of a contractor and provides insight into how HMRC would view the assignment, but professional advice should always be sought for official guidance on IR35 compliance.
For any business – or contractor for that matter – looking to use CEST, I would advise them to proceed with caution. Although it gives a helpful indication as to IR35 status, this is not a tool I would hang my hat on. Not only is it unfairly weighted to an inside IR35 decision but in around 20 percent of all assessments, it will give an undetermined outcome, meaning you will need to assess using a different method.
More than six months on from IR35 reform – what have we learned?
A large number of end hirers remain confused around the official regulation, with some choosing to stop working with limited company contractors to avoid any potential penalties and many choosing to work through umbrella companies. But with a worrying number of tax avoidance schemes in the market masquerading as compliant umbrella companies, some contractors are unfortunately being burnt by non-compliant so-called umbrella employers.
In early October, the government issued a 1,300-word document titled ‘Check how to reduce your risk of using an umbrella company who operates a tax avoidance scheme’, which is a positive step in recognising the importance of issuing official guidance for contractors. Unfortunately though, this does little by way of enacting official regulation across the sector and we are yet to see any government-backed ‘best practice’ for contractors looking to work via an umbrella company.
A simple step that contractors can take to check the legitimacy of an umbrella company – should they choose to work via one – is to see if they are accredited by bodies such as the Freelancer & Contractor Services Association (FCSA). FCSA only awards accreditation to compliant umbrellas.
Standing back, while it is encouraging to see how the contractor community has responded to the challenges brought on by IR35 reform, taking a more creative and flexible approach to their working style, it remains crucial for there to be better education on the reform and support to help contractors work effectively despite the clear complexity of the off-payroll rules.