Will the private sector legislation be enacted in April 2019?

We will know more when the Autumn Budget Statement is made on 29 October. But feedback from HMRC is that they are keen and the Chancellor can see the pound signs. Furthermore, when you think how the public sector changes were rushed in for April 2017 when everyone was entirely in the dark, April 2019 seems a distinct possibility, as we pretty much know the end game.

Will end clients simply deem all existing private sector contracts within the scope of IR35?

Our view is that some big organisations engaging hundreds of contractors may need to find a balance between the admin burden/cost of classifying each engagement and whether making ‘blanket decisions’ might impact the availability of resources. It is quite possible that banks in particular will determine that engagements below a particular level – potentially based on day rate, full-time equivalent job grade or some other measure – will be deemed 'caught'. It is conceivable, but probably unlikely, that they may offer slightly increased rates to compensate for the contractor’s tax burden, but they may equally decide that there will be enough contractors willing to fill the shoes of those who decide the grass is greener elsewhere.

Moreover, agencies who will be the fee-payers will not want the liability landing at their door and so they will only be too happy to go with the end client’s decision; particularly, if they know that they can find others to fill the vacancies.

In our opinion, it wouldn’t be sensible for end clients to make blanket decisions at senior levels for fear of losing the best talent. It seems logical that, for senior roles, all parties in the contractual/recruitment chain will want to undertake due diligence to make sure the best contractors are retained.

If a current contract is deemed as being caught by IR35; how does this affect previous contracts, particularly given the longevity of this contract?

In the consultation, HMRC suggested that just over 3% of all engagements are currently being treated as caught by IR35, which confirms the evidence HMRC offered to the House of Lords Select Committee in 2014. HMRC believe that the right figure is that about 33% of all engagements should be treated as caught. Whether that is the right figure or not, it cannot be denied that 3% is too low and that the size of the problem is huge (and arguably of HMRC’s making because IR35 legislation is so poor, and HMRC have great difficulties in enforcing it – hence the proposed changes). So it is inevitable that some engagements that will be deemed to be caught under the new regime in the private sector should have been treated as caught previously.

However, we are confident that this won’t affect engagements which have been properly and independently reviewed. As long as the facts have been honestly disclosed, then there is no reason to suppose that HMRC would win such an argument – particularly where a blanket decision is taken without any due diligence after the private sector changes take effect. Where tax losses insurance is in place, then, of course, there is that safety net.

In terms of the length of time engaged by an end client, HMRC will not know that until they select you for enquiry (that’s “if” NOT “when”). Whilst length of time isn’t a status factor, one cannot deny that the contractual relationship can change over time without the parties realising it and certainly without any intention to do so. Where an engagement has been reviewed by Abbey Tax and the opinion was ‘not caught’, then it is our job to defend your position should you be investigated. If we are unsuccessful, you have the tax losses insurance in place.

What sort of notice is likely to be given for contract determination prior to 6 April 2019? 

Based on the previous experience, the Autumn Budget Statement is likely to give us a definitive timetable which is taking place on 29 October. 

Do you have any general advice that you are offering IR35 clients?

Only the contractor and the contractor’s end client really know the true working relationship and whether that is one of independent contractors. Therefore a contractor might want to review whether the relationship has changed over time and ask themselves questions such as: have I become part and parcel of your client’s organisation? Am I treated like an employee in terms of attending meetings/training/social events etc.? Is my work genuinely still project orientated or am I taking on things on an ad hoc basis like an employee would, i.e. “John, could you please just do this…?”.

Otherwise, in practical terms, if a contractor has undertaken an independent review of their engagement, they have done everything that HMRC could have asked in terms of due diligence by having that review. Having Abbey Tax fee protection (tax investigations) cover in place means that a contractor will be defended by IR35 experts with an excellent track record and determination when it comes to defending our clients. Finally, where a contractor has tax losses insurance in place; we are not sure that there is much else a contractor could do!

If the IR35 rules currently applying to public sector bodies are moved into the private sector, what will the process be to appeal a decision, that a contractor is caught by IR35?

The public sector legislation places the decision-making power in the hands of the end client. Whilst there is a requirement for the client to make a decision and provide information, there is currently no mechanism for a PSC to appeal a decision made by the public sector body.

If the private sector legislation mirrors this then equally there will be no right of appeal for a contractor against a decision made by the end client.

Would a contractor be better becoming an umbrella employee?

This is not a straightforward answer and will depend very much on the contractor’s working practices and client engagements. A contractor working in the public sector where all engagements are caught would find that there is effectively no profit against which to deduct expenses (because all the fees that the PSC invoices are accounted for as either tax/NICs or net income after tax – see next FAQ below) and so operating through a limited company ceases to be a viable proposition.

Some individuals in the public sector have turned to the umbrella company solution and found that working via an umbrella provides them with more security, yet still retains flexibility without the costs of keeping a limited company open. It is very much dependent on personal circumstances and preferences.

If caught by IR35; how much worse off might the contractor be?

This will depend on personal circumstances, but the effect of operating within the IR35 legislation means that payments made to the contractor’s PSC are subjected to tax and NI by the agency making payment to the PSC. This means, in effect, the contractor is in the same position, for tax purposes, as an employee would be. 

We have seen in the public sector that while some organisations have increased day rates to accommodate the employer’s NICs, however, other public sector bodies have been unable to do so due to margins. Depending on whom the contractor is engaging with and what the agreements are with the end client organisations will very much dictate the level of income the contractor receives. 

This situation is likely to be mirrored in the private sector.