In April 2020, IR35 legislation that governs the taxation of contractors operating through an intermediary will change to be in-line with the public sector, and will require medium to large-sized clients to determine whether a contractor falls inside or outside of IR35.
In the public sector it is up to the contractor’s client to determine whether IR35 applies to a contractor, and if it does, they must add the contractor onto their payroll and deduct income tax and National insurance before paying the contractor.
In the private sector, contractors are required by IR35 to make an extra payment to compensate for the additional tax and national insurance that HMRC would have received on an equivalent employee’s wages.
This will change in April 2020, and as in the public sector, HMRC will be able to collect additional payments where a contractor is an employee in all but name.
For accountants advising their clients, particularly those who have a number of contractors on their books, it is important to be aware of IR35 in order to ensure their clients are making the right status determinations to avoid any extra fees from HMRC. In the case of the three BBC presenters who HMRC chased for additional fees, the combined total was over £800,000.
Plan ahead for IR35
Blair Adams, a partner in the employment team at Law Firm Winkworth Sherwood, has been dealing with several business clients who are looking to get in-line with IR35 legislation ahead of April 2020.
“The prudent ones are planning ahead already. So they’re analysing their contractual relationships, auditing them, trying to classify them and trying to do the early-stage determination to see who fits in where,” he says. Then the really active ones are then going a step further, and they’re talking to the ones who may fall on the wrong side of the line, to negotiate some new sort of arrangement.
“For example, bringing them on as an employee, maybe some sort of worker status, depending on the role and position they’ve got in the organization.”
Not all are as interested as these model examples of clients however, with some not considering IR35 the most important issue that must be dealt with.
“I dare say there are just as many clients who are saying: ‘tell me in March – at the moment I’m worried about Brexit.’ It depends what’s on their agenda really.”
Those who are leaving it late to make these status determinations could be in for some challenges when April 2020 arrives. The contractor population can be very influential, and some who are in demand will be able to say to their clients that they only work through a personal services company (PSC), therefore forcing their clients hand to either covering the extra fees by HMRC without taking them out of the contractor’s own fees, or ceasing to pay for the contractor’s services.
Some contractors will not have this luxury, however. “The less in demand contractor perhaps in sectors such as IT were there’s an awful lot of self-employed contractors – may not be able to do that,” says Mr Adams.
“If a client says to them: ‘well actually, we think our relationship is not true self-employment, then we’re going to make a status determination and we’re going to start deducting tax from your fees.’
“Then contractors are going to have a choice and could drift away and work for somebody else who’s not taking that approach. So businesses could lose some of their key people.”
Mr Adams’ advice to businesses who want to avoid this situation in April 2020, is to start early and to focus on the relationships they have with contractors, which are through intermediaries because that is what is really being targeted by HMRC and this legislation.
“Businesses must upscale what their test for self-employment is. The HMRC tool can help to analyse the contractor workforce because if there is any way they can hire people on through a different mechanism, in a different relationship that may work better for you than having to apply extra fees.”
Some contractors may be willing to accept a different arrangement, which will not have the same tax benefits of working through a PSC, but will still offer similar flexible working, such as zero-hour contracts.
“I know one client that has talked to, I think 120 contractors, and a number were prepared to become zero-hours workers which actually is a relationship that works very well for them because it gives them flexibility.”
Industries that rely heavily on contractors are going to be heavily impacted. As shown by the public sector and the BBC in particular potentially having 800 contractors that will be targeted by IR35, those that require specialist workers in industries that are largely dominated by contractors will be heavily targeted by HMRC. Construction is one, and IT another, that will be under the spotlight.
“I can see HMRC taking a sector by sector approach and trying to clean up what they can before moving on and having another go” says Adams. “But you can’t blame them – their job is to collect the tax, and there has clearly been lots of – shall we say questionable – tax arrangements through contractor systems – so they’re just doing their job.”
What does this mean for accountants? Mr Adams believes that accountants will be involved in a similar way he has been as a lawyer, in helping business clients with status determinations and also accounting for the fees that may be incurred.
Speaking on accountants, he says: “Accountants will help, just as lawyers will, with status determination, with the challenge process, with the sort of preparatory work as well – analysing contractor populations from large companies. Accountants are also good at coming up with new ideas and new solutions, so maybe we’ll see some new solutions.
“I get the feeling from talking to people in the recruitment industry, that the new solutions will largely be based on umbrella company intermediaries – so almost putting more intermediaries back in the chain. I’m not sure that’s necessarily healthy, but I think there’s a lot of work for accountants, because it’s largely tax-driven, which is why there will be a lot for lawyers as well!”
The creation of more umbrella companies, Adams believes, could negate the purpose of the legislation, which many believe is the root cause of the Loan Charge crisis, another charge contractors are facing having been paid through offshore intermediaries.
“I think there are some quirks in the legislation they’ve actually produced because when they did the consultation and all the pre-announcements, the aim behind this was to put the client squarely in the frame for the tax. So if you, as a company, were engaging people through intermediaries, and they were really not self-employed, then that was your problem,” Adams says.
“But the way this legislation is coming out, in certain circumstances, mean that if I, as the client, make my status determination, in writing, and I pass that down the chain – so I give it to you, you’re the agent, you give it to the other agent, and they give it to the personal service company, you give it to the individual who’s at the end of the chain – I’m off the hook, in many cases.
“It’s less watertight than it could be. This could potentially encourage the creation of unnecessarily complex chains, where everyone’s got someone else to pass it down to, that could mean the re-emergence of questionable umbrella companies.”
Finally, what advice would Adams give to businesses and accountants advising their clients alike? “Understand who your contractors are – understand how they’re engaged – do a pre-assessment of whether you think they’re going to be within or outside of IR35,” he says. “That then gives you the basis on which to start talking.”