From April 2017, new rules came into force which mean that the responsibility for operating IR35 now lies in the hands of clients rather than contractors themselves. Currently the new legislation applies only to public sector contracts.
Why were the off payroll rules put in place?
Since the Intermediaries Legislation (IR35) was first implemented in 2000 – to clamp down on what was believed to be a growing practice of ‘disguised employment’, successive governments have stated that the original rules have not been effective enough in deterring people from ‘tax motivated incorporation’.
A disguised employee is someone who conducts their work in the same manner, subject to the same rules and supervision as a traditional employee… but is paid via a limited company.
The 2016 Autumn Statement confirmed the Chancellor’s intentions behind the new rules:
“This reform will help to tackle the high levels of non-compliance with the current rules and means that those working in a similar way to employees in the public sector will pay the same taxes as employees.”
How do the off payroll rules work in practice?
Prior to the implementation of these reforms, it was the responsibility of contractors working in the public sector to reassure clients that they were complying with the IR35 rules.
However, since 6th April 2017, the responsibility for determining a contractor’s employment status now lies with the public sector client, or recruitment agency. The organisation in question must also calculate and deduct any income tax and National Insurance Contributions from the worker – and pay these liabilities to HMRC.
Clients have been directed to use the HMRC CEST IR35 testing tool to help establish whether or not a worker is caught by IR35 or not, but serious doubts have been raised about the accuracy of the tool.
Seb Maley, Director of Qdos Contractor told us: “Rather than the tool being based on a solid legal foundation, it appeared HMRC were very much reacting to the results it was generating and tweaking it to achieve the metrics they were looking for.”
Importantly, if a public sector body (PSB) decides that a particular contract lies outside of the IR35 rules, but this assertion is later found to be incorrect, the PSB itself is liable for making the decision – something most clients will be very keen to avoid, for obvious reasons.
As a result, some organisations have decided to make ‘blanket decisions’ – deciding that all of their contractors are caught by the new rules, rather than risk being responsible for incorrect decisions.
Private sector to be hit by IR35 reform in April 2020
Although many in the contracting industry have suspected the public sector reforms are merely a ‘practice run’ before the rules are extended to the far larger private sector, nothing was published officially until a consultation document was released in early 2018. The consultation ended in August 2018.
Mel Stride, the Financial Secretary to the Treasury has stated his belief that the cost of non-compliance in the private sector will reach £1.2bn by 2022.
And sure enough, in October 2018 the Chancellor announced the extension of the off payroll rules to most private sector businesses from April 2020 onwards.