7th January 2019
When is a contractor not a contractor? That in essence is the question posed by IR35; a complex system which is designed to differentiate true contractors from those who, for all other intents and purposes, could be seen as employees. Sometimes referred to as disguised employment or off payroll working, the IR35 ruling was originally devised in order to regularise the tax position of those who are employees even though they are paid via a service company rather than through payroll.
In 2017 the first stage of IR35 reform saw the responsibility for determining IR35 status move from contractors to their end clients, provided those clients were in the public sector. This meant that public sector bodies or agencies working on their behalf had to calculate and collect tax and national insurance for any payments to contractors which they deemed to be caught by IR35. Moreover, if the public body incorrectly determined the IR35 status they became responsible for any back payments and fines due.
HMRC are currently planning to extend the IR35 reforms into the private sector. With effect from April 2020, large and medium size businesses will take on the responsibility for determining the IR35 status of their contractors and collecting any tax due. Small businesses are exempt from this ruling thereby, according to the Chancellor, “minimising administrative burdens for the vast majority of engagers.”
Why the change? Well, according to HM Treasury the country is missing out on £1.3bn of tax due to employees operating as contractors outside of IR35. Having said that, there has been some dispute with the additional tax apparently raised from the change in respect of the public sector. In particular, HMRC’s own IR35 testing tool, ‘Check Employment Status for Tax’ (CEST), has been criticised for not taking account of specific working arrangements leading to incorrect determinations. In addition some bodies appear to have taken a ‘blanket decision’ route, which again may result in incorrect results and open up the possibility for tax return claims.
One of the reasons for the reform in respect of large and medium companies being pushed into 2020 is to give contractors and companies time to prepare and to ensure that the relationship has been correctly defined. Thompson Jenner Partner Paul Lewis commented that “this preparation should include a contract review to ensure that the contract accurately reflects the working practices and provides clear evidence to support the contractor’s status.” As this will have to be carried out on an individual contract basis it could prove time both consuming in the calculation and costly should the determination prove to be incorrect.
Whilst the reform in the private sector may appear to some as is a short-sighted tax cash grab from the Government, it can be dealt with careful and timely preparation. Thompson Jenner LLP are able to offer professional help and support to contractors and businesses in reviewing and checking contracts and working practices.
If you would like to find out more about IR35 please contact Paul Lewis, or one of our other Partners or one of our tax advisers in Exmouth & Exeter on 01392 258553 or 01395 279521 to arrange a free initial meeting.