I first started in IT Contract Recruitment almost 20 years ago, when IR35 (in its initial guise) came into force.
IR35 is likely to have a big impact on your business if you are an IT Contractor, and so over the next few months, I will be sharing my knowledge of this legislation with you and helping you keep abreast of the changes. The aim is not to provide legal advice to you, I am not able to do that, but what I can do is share with you my interpretation of the significant changes this legislation will bring from April next year.
Brief Background to IR35
IR35 first came into law as part of the Finance Act 2000, which established rules to tackle tax avoidance using personal service companies (PSC’s) - and it was expected to yield a return of around £200 - £475 million for the Treasury.
The Government reviewed IR35 in 2010 and from this review, they established the IR35 forum. This was made up of members of leading contracting and recruitment industry bodies - including APSCo, FCSA, FSB and REC - employment status specialists, members of leading accountancy bodies - ACCA, CIOT, ICAEW, and HMRC. The objective of the forum was to improve the administration of IR35 overall – but this did not lead to a significant tax revenue increase for HMRC.
In the 12 months from 2012 to 2013, 256 cases were opened by HMRC where IR35 was the main risk, and the yield from these cases was £1.1 million. Obviously, this figure was nowhere near what HMRC had anticipated and so this led to a change of tack in 2017.
The new legislation, entitled ‘Off-Payroll Working in the Public Sector’ came into force in April 2017 with barely any notice, indeed the CEST tool (Check Employment Status for Tax) was established just weeks before the new rules came into effect, which led to widespread criticism. HMRC has since revealed that an estimated £410 million of income tax and NICs (National Insurance Contributions) has been remitted from this legislation.
Due to the deemed success of the Public Sector reforms (from HM Treasury’s perspective at least) the government announced that it is going to extend its existing ‘off-payroll’ working rules into the private sector to address what they claim is a £1.2 billion a year in lost tax take.
What the IR35 Reforms will trigger in 2020
If you are operating via a PSC (Personal Service Company), the Director of your company will no longer be able to make the status determination relating to whether your assignment is inside or outside IR35
The tax liability no longer resides with the PSC but with the fee payer (normally the agency or last party before the PSC if a status determination has been made)
A significant increase in risk for the supply chain likely to mean many more contracts inside IR35 with the CEST Tool being heavily relied on for status determination
For any contracts that are outside IR35, there will be a heavier emphasis on the ‘Pillars of IR35’ (which we will cover in a later blog post)
Do you risk a retrospective HMRC investigation if you are deemed as being inside IR35?
In the budget this year, the Government confirmed that:
HMRC will focus its efforts on ensuring businesses comply with the reform rather than focusing on historic cases
HMRC will not carry out targeted campaigns into previous years when individuals start paying employment taxes under IR35 for the first time following the reform
Businesses’ decisions about whether their workers are within the rules will not automatically trigger an enquiry into earlier years
This however is not a cast-iron guarantee, and you should ensure that your current status determination (made by you) is accurate and in line with legislation as this has barely changed since its introduction in 2000.
Hopefully, this sets some background to the IR35 reforms and further articles will explore this further, but if you have any other questions please feel free to email me, Jonathon Webley (Managing Director) at firstname.lastname@example.org or ring me directly on 0161 416 6634 or 07941 798 021.