Is the private sector ready for IR35 reform?

The draft private sector IR35 legislation raises many entirely legitimate concerns, but the central problem, the one that is the foundation upon which all other concerns are based, isn’t actually in the draft clauses at all. It is that IR35 status is so difficult to work out. In fact, it is impossible to certain about IR35. No one understands it, even HMRC (as evidenced by them losing far more cases at tribunal than they’ve won).

If any change is needed to IR35, it is greater clarity over when it does and doesn’t apply. But rather than making it easier to get the determinations right, the powers-that-be are proposing to shift who it is that must make the determinations. This opens the world of pain that is IR35 to a whole new audience of terrified taxpayers. And they are terrified.

The IR35 rules are so complex, clients will not be able to tell for certain whether an engagement is caught. Clients will become liable if they erroneously determine that IR35 doesn’t apply, so they are more likely to take a risk-averse approach and decide to apply IR35 if there is any doubt whatsoever (and there is always an element of doubt when it comes to IR35).

We have already seen some clients – most of the major banks and a few other large companies too – publicly announce they will no longer hire limited company contractors at all. They fear getting determinations wrong, so they have decided not to hire anyone that would require them to become embroiled in the IR35 regime.

This is a highly worrying trend and it makes a mockery of the Government’s claim that the legislation won’t impact the genuinely self-employed. Very clearly, genuinely self-employed people are being impacted now. Their clients refuse to do business with them because of the compliance risk created by this legislation. We have made this point to the Government; Government has nodded along appropriately while doing nothing to address the point.

Some clients may consider issuing ‘inside IR35’ determinations on all their engagements, regardless of the actual IR35 status. This is sometimes referred to as a ‘blanket determination’ or ‘blanket assessment’. Clients must not do this. The legislation requires them to take ‘reasonable care’ when determining status – blanket assessments fail the ‘reasonable care’ provision. But as long employment taxes are being deducted at source, HMRC is unlikely to hold them accountable.

IPSE continues to make the case for delaying the April roll-out of this catastrophic policy. We will be giving evidence to the House of Lords Finance Bill Sub-Committee later this month and telling them in no uncertain terms that the Government has got this one wrong. We would like all contractors to write to that committee and submit their own evidence. Tell them how this policy will affect your business. Will you have to close? Will move abroad? Retire earlier than planned? Let’s leave the Government in no doubt about the strength of feeling that exists out there. You can submit written evidence by email to financebill@parliament.uk. The deadline for submissions is 25th February.

In the meantime, IPSE is advising any contractors whose client hasn’t yet spoken to them about IR35, to consider approaching them. Explain why the engagement doesn’t fall within IR35 and provide evidence to back that up. That could be an IR35 contract review or even a favourable CEST result. You could set out in writing the true nature of the engagement, noting all the reasons why your engagement could not, and should not, be misconstrued as disguised employment.

The one fact that may, ironically, help you in your discussions is that your client doesn’t understand IR35 – they can’t do because no one does. It’s an impossible riddle. You may be able to present yourself as the font of all knowledge on IR35 and pursue them accordingly. Good luck.

This article was written by IPSE’s Policy Development Manager, Alasdair Hutchins.