Following the revelation earlier in the week that HMRC are scrutinising television presenters to determine whether they will be subject to new IR35 tax regulations, we questioned which other industries will be affected by the new legislation, due to come into effect in April 2020, and what businesses and freelancers should be mindful of once the legislation is in place.
Victoria Goode, consultant partner in the employment team at law firm Lewis Silkin and Mike Hodges, partner at accountancy firm Saffery Champness shared their thoughts with Accountancy Age on IR35.
What industries will be impacted most by IR35 legislation?
A number of industries rely heavily on freelance workers, and those with more freelance workers are going to be affected the most by IR35 legislation.
In addition to the TV industry, with the BBC alone warning that up to 800 of their employees could be subject to HMRC investigations, Goode said the IT, Engineering and Construction industries would be most affected.
“In addition, many interim management roles are carried out by freelancers providing their services through a personal services company such as HR, finance and legal,” she added.
Hodges also highlighted construction, saying: “It tends to be sector specific, but there are those where historically there has been an expectation that an engagement will be on a self-employed basis. For me a stand out is construction.”
Is the introduction of IR35 for the private sector seen as a positive or negative?
Goode and Hodges disagreed on whether they thought that IR35 was positive legislation. Goode said: “Ultimately negative all round. HMRC believes that 90% of freelancers who fall within IR35 are not complying with the existing IR35 rules so these reforms are driven by HMRC’s need to achieve compliance.
“Whilst the aim of achieving compliance is correct, HMRC should have focused its efforts on ensuring compliance by the freelancer rather than passing the responsibility for compliance to end users and those entities that pay the personal services companies.
“The IR35 reforms substantially increase the burden and costs on business at a time when business is already facing unprecedented change and uncertainty and ever increasingly complex legislative changes in all areas.”
However, Hodges said that the idea, in principle, is good, but was concerned about the implementation of it, saying: “I think it is one where the concept is great, but applying it to a particular set of facts is where it becomes difficult.
“The fact that HMRC has lost a number of tax tribunal cases illustrates the point that it is possible for different conclusions to be reached on the same facts and for the tribunal to take the opposite view from HMRC.
“How this pans out when it is thrown out for those engaging workers in the private sector from next April and how easy it will be for them to operate the rules in a practical way and in real time will be interesting to see.”
How can businesses protect themselves from the impact of IR35?
There are concerns about the tool provided by HMRC, known as ‘CEST’, to help employees determine whether they will be considered a freelancer or not by HMRC. In HMRC’s words, CEST will “Find out if you, or a worker on a specific engagement, should be classed as employed or self-employed for tax purposes.”
The concerns centre around the accuracy of the results that the tool gives. According to HMRC, the tool arrives to a conclusion 85% of the time, with 15% of cases requiring further investigation.
But there has been debate between HMRC and practitioners around the accuracy of these results, with recent high-profile cases involving TV presenters highlighting the issue.
Hodges said: “It is going to be a case of being clear as to who has control over how an engagement is controlled.
“HMRC has promised that the CEST online status tool will be beefed up, and those engaging workers on a self-employed basis will be looking to be able to rely on this (provided they give honest answers) as their protection.
“The recent TV cases have perhaps thrown doubt on whether the CEST tool will be quite the panacea it is hoped, and we will have to wait and see.”
When asked what she would suggest to businesses in order to protect themselves from IR35 legislation, Goode gave a comprehensive list, writing:
- Complete due diligence on the labour supply chain to identify those contracts where the freelancer is providing their services via a personal services company. This includes those arrangements where the business is contracting via an agency rather than directly with the freelancer’s personal services company.
- Establish a robust process and controls for recording the use of freelancers centrally.
- Ascertain how those contracts are being operated in practice.
- Establish a robust process for determining employment status on a case by case basis. HMRC’s Check Employment Status Tool – CEST – provides a starting point for determining status, and has the advantage of generally being binding on HMRC). However, CEST is a very blunt tool – in some situations it may not provide a determination or the determination it provides may be out of line with the facts. Businesses therefore need a back-up process.
- Identify who is going to apply the IR35 rules and make sure that they are trained to do so.
- Identify any freelancers for whom by tweaking working practices business could ensure that they are genuinely outside IR35.
- Ensure valid status determination statements are provided to the freelancer including reasons for the determination.
- Decide which freelancers are business critical and for whom therefore the business is prepared to pay the extra costs. For those contractors who are not business critical, consider whether those contracts can be terminated.
- Monitor each freelancer’s status and re-run the determination every 6 months or so and each time there is a change in circumstances.
- Ensure that there is a properly drafted contract for each engagement which reflects the working arrangements and status determination and gives the business the right to deduct PAYE and employee NICs from the fees if required.
- Consider whether any process and/or systems changes are required, for example on-boarding processes and payroll and accounts payable systems.
- Consider whether using freelancers are still the best solution for the resourcing needs of the business.