The stand-out announcement from the October 2018 Budget was the extension of the ‘off-payroll’ rules to most private sector businesses from April 2020 onwards (later delayed to 2021). So, what does this mean for contractors?
IR35 since 2000, ‘off-payroll’ addition since 2017
IR35 has been in place since 2000. It was created to clamp down on perceived tax avoidance by individuals who worked via their own limited companies, whilst working for clients in the same way as normal employees. The legislation takes away the tax advantages of incorporating for those who are deemed to be caught by IR35.
The ‘off-payroll’ rules were applied to the existing legislation from April 2017 onwards. These additional rules place the burden of determining a contractor’s IR35 status on the shoulders of the client – initially only those working in the public sector. If a contractor is found to be ‘inside’ IR35, the client is now responsible for deducting payroll taxes from the contractor’s earnings and also paying employers’ National Insurance contributions.
Problems with the off-payroll rules in the public sector
Evidence from across the contracting industry suggests that there have been significant problems with the implementation of the off-payroll rules across the public sector. Issues reported include:
- The CEST tool (used to help clients work out employment status) is inaccurate.
- The rules are crude and hard to understand for all involved.
- The rules have forced some public sector workers to abandon limited companies and lured by tax avoidance schemes.
- Some clients prefer to use blanket IR35 determinations rather than risk making incorrect status decisions, meaning some contractors are deemed to be working within IR35 when they shouldn’t be.
April 2020 (now 2021) – IR35 reform in the private sector
At the 2018 Budget, the Chancellor announced that the off-payroll rules will be applied to most private sector businesses – only ‘small organisations’ will be excluded. See page 42 of the Red Book.
Responsibility for operating the off-payroll working rules will move from individuals to the organisation, agency or other third party engaging the worker.
This means that from the implementation date, clients will become responsible for working out whether or not contractors are caught by IR35 or not.
The reforms will not take effect for over a year, giving all involved some time to prepare. A consultation will be launched shortly on how the private sector reform will work in practice.
Hopefully, this additional time will help HMRC fine-tune its systems, including the much-maligned CEST tool, and associated guidance.
In the meantime, you should continue to have all new contracts professionally reviewed to ensure you are operating outside the IR35 rules, and consider taking out IR35 insurance.
As a result of the pandemic, the private sector reforms will now go ahead in April 2021.