With public sector IR35 reform already in place, minutes from HMRC’s latest IR35 forum suggest similar reform could hit the private sector soon.
This is despite claims that numerous issues around public sector IR35 reform still remain – here’s what self-employed contractors need to know.
Update 30/10/2018: in the 2018 Autumn Budget, Philip Hammond confirmed that the government will be extending public sector IR35 reform to the private sector in April 2020. See what contractors need to know here.
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What is IR35?
Since IR35 legislation began in 2000, contractors working via their limited companies have been responsible for determining their own employment status.
But IR35 rules for the public sector introduced in April 2017 have shifted the responsibility from the contractor to the public sector client or hirer. They assess each off-payroll role and work out whether it falls within IR35 or not.
If the public sector client or hirer gets that decision wrong, the liability for any missing tax sits with them.
The timeline for IR35 reform in the private sector
HMRC has published minutes from its IR35 forum in December, in which it says that IR35 reform in the public sector has increased compliance. HMRC’s “possible next step” is to extend that reform to the private sector.
Later in the same document, HMRC identifies a “growing and immediate Exchequer risk” of IR35 non-compliance in the private sector, which has stoked speculation that private sector IR35 reform is imminent.
With a consultation due to be published in 2018, ContractorCalculator CEO Dave Chaplin believes any proposed private sector changes will be announced in 2018’s Autumn Budget – with legislation then going live in April 2019.
What has IR35 reform meant for public sector contractors?
HMRC believes that “early indications are that public sector compliance is increasing as a result” of the changes made last year, but it still recognises that there are numerous concerns.
Dave Chaplin says it’s farcical that HMRC “seems willing to overlook” issues to collect more money for the government.
He identifies the following pain points:
- Continued non-compliance – tax avoidance schemes are being promoted to contractors as a way of getting around the legislation
- Flawed CEST tool – HMRC’s online testing tool that checks employment status is unreliable
- ‘Blanket rules’ – because getting it wrong could be costly, public sector bodies are supposedly taking a risk-averse approach and ruling contractors within IR35, when the role may fall outside
- Employment rights – those determined within IR35 pay tax and National Insurance, but do not have the same rights as employees. HMRC considers employment status a separate issue
How to prepare for private sector IR35 reform
The website Contractor UK believes that private sector companies, recruiters and contractors can manage reform, but they need to start preparing now.
With lessons learned from the public sector, private sector companies and recruiters have time on their side. They should make sure they have everything in place to make accurate decisions on IR35 when the time comes.
This could include using the services of third-party IR35 specialists, considering the rules are already notoriously complex.
For contractors, you should be prepared to collaborate across the contractual chain to ensure accurate decisions are made.
Your engagers should be ready to open conversation with you sooner rather than later to make sure that all parties involved make well-informed decisions.
Do you work in the public sector? If so, how has IR35 reform affected you? Let us know in the comments below.