IR35 in the private sector: Still more questions than answers

    As yet, end clients, agencies and contractors still face many unanswered questions concerning the impending changes to IR35 into the private sector. But can we establish any solutions at this point?
     

    Why?

    We probably know a lot about the end destination by considering the legislative changes and the initial reactions to the new regime for the public sector introduced in April 2017. And whether you agree with the public sector changes or not, we cannot continue with a system that differentiates how your tax is calculated by whether you are working in the private or public sector. Assuming that there is no appetite to repeal the public sector changes, the private sector will be required to fall in line.

    It is also not a great leap of imagination to assume that the Chancellor is eying up an additional £1bn in revenue coming from the private sector (to add to the £410m the consultation suggested had been raised from the public sector changes) and is unlikely to want to pass it up.

    We are also aware that many contractors, agencies and end clients are unprepared. We won’t pretend to have all the answers not least because we need to wait for the Budget on 29 October and any draft legislation, yet we believe that we will have due diligence and insurance solutions to help all the parties in the recruitment and contractual chain in time for the new rules coming in.
     

    When?

    Of course, that IS the question.

    Until the consultation was issued, on 18 May 2018, we would have argued that there was enough going on politically to suggest 2020 at the earliest. However, the potential time line is very similar to the approach followed in 2016 for the April 2017 implementation of the public sector changes and suggests that the train has been set in motion for April 2019. You only have to look at the introduction of the 2014 Agency Legislation to know that HMRC are quite happy to leave things to the last minute.

    Will there be any changes to the way IR35 is determined? There have been three self employment consultations which had some overlap with the IR35 consultation. If statutory tests come in for self employment, presumably these will also have to apply to IR35.

    This, of course, means HMRC’s cherished CEST tool will have to be revamped – as it will be if the recommendations of the Employment Status Consultation are that mutuality of obligations continues to be a relevant test.

    Practitioners need HMRC to address the corporation tax issues surrounding an engagement which is 'caught' by IR35. Simply showing reduced turnover in the accounts is not the answer.
     

    What to do? (And other questions)

    How will end clients react to the likely changes? Will some take the same approach as some public sector bodies and declare all engagements as caught? How will agencies react? Is there anything that contractors can do to get agreement with their agency and end client to the engagement being 'not caught'? And, in reality, who is the decision maker when it comes to IR35? 
     

    How to do it? (And some practical solutions)

    So how can we work with you to help your end client engagers, agency and contractor clients navigate safely through this potential minefield?

    End clients

    In answer to the first two questions, we think clients may be conservative about making the IR35 status decision and are more likely to go with caught than not caught if there is any chance of the liability landing at their door.

    There are also practical considerations: if you are a large engager, do you want to review several hundred or even thousands of engagements a number of times a year? Is there a balance to be struck between hours spent on compliance and taking blanket decisions on ‘lower grade’ engagements risking that you might have to pay a little more to fill the role?

    That’s a commercial question for each engager, but where to draw the line requires a good knowledge of IR35 and training for the people making the decisions. That is certainly an area where we can assist.

    Agencies

    There is an argument to say that despite the fact that the legislation states it is the responsibility of the end client to make the status decision, it is the agency closest to the contractor’s personal service company (PSC) who is the fee-payer. And it is the fee-payer who is liable if the decision is wrong. Therefore where the decision coming down from the end client is not caught, but the agency does not feel comfortable with that decision; it is very likely the agency might decide to pay net to avoid any liability.

    That approach whilst understandable – but less than ideal – will be set against a background of the contractor wanting the engagement to be not caught, so that they can receive payment gross. Again, the question is where do you draw the line? Again, the answer is in part training, but as a leading insurer in the recruitment sector, there are also other options to provide the agency with peace of mind:

    • Contract assessment to ensure that the agency’s contract supports a not caught decision
    • Working with end clients and contractors to determine the status of specific engagements
    • Specialist Tax Investigations Insurance to insure against an HMRC investigation
    • Tax Losses Insurance to protect against the potential liability of a not caught decision being overturned

    We already offer a variety of bespoke retainer packages to clients from a broad range of sectors, including agencies and end client engagers.

    Contractors

    The lifespan of the traditional contract review may come to an end with the introduction of the private sector changes, but contractors will still want to press their case that an engagement is not caught; and it is surely better to present one’s argument to an agency/end client on the basis of compelling evidence supported by an independent review?

    We will be looking to support contractors in this area as well. Here you will find some recent FAQs which have been asked by contractors concerned about the changes they might face.

    With the key unknown being the date that the private sector changes will come into force, we are not yet in a position to issue policies or provide the necessary training, but it may not be too long before we are.

    If you have clients who are engagers, agencies and/or contractors and you would like to be kept up to date about the changes, then please send us your details and we will keep you up to date as to how you can help your clients. Alternatively please call 0345 066 00 35.