IR35 changes: How they affect private sector contracts
Changes to the IR35 legislation will be implemented on April 6th, 2020, and will affect contractors and employers working in the private sector.
The IR35 law has been controversial since it was introduced 20 years ago, not least because many people find it complicated to understand. The new changes could catch people out if they are not properly prepared.
So what is IR35 and what are the new changes coming into effect in April?
What is IR35?
IR35 regulations are aimed at identifying genuine contractors as opposed to people claiming to be contractors but who are, in effect, employees. This matters because genuine contractors are entitled to tax efficiencies for the self-employed.
In addition, when a person claims to be a contractor rather than an employee, this also affects the company they are working for. It means the company does not have to pay employee benefits and employers’ National Insurance contributions.
HMRC uses a range of definitions to establish whether a person is a contractor or not. Contractors who are seen by HMRC as an employee are said to be ‘inside’ IR35, whereas those deemed to be self-employed are ‘outside’ IR35. People who are identified as employees will be subject to PAYE and National Insurance deductions.
What are the IR35 changes in April 2020?
At the moment, the burden of establishing whether a person is a contractor or an employee depends on whether they are working in the private or public sector. Since 2017, public sector organisations have been obliged to establish if the contractor is inside IR35 or not. In the private sector, the responsibility for this has rested with the contractor.
However, the IR35 changes due to take effect in April will see these public sector rules apply to the private sector as well. This means, from April 6th, the burden will be on private sector employers to determine the IR35 status of any contractors they use. It will only apply to medium and large private sector organisations, as defined by the Companies Act 2006.
How does HMRC define a contractor?
HMRC uses various criteria to establish if someone is self-employed and providing services as a contractor. One of the ways they do this is to look for the following points within the contract:
> Does the contractor have control over their work? A contractor will usually decide things like when they start and finish work, and how they complete it. If this is set by the employer, or if the employer is giving a large degree of supervision or guidance, then this may fall within IR35.
> Is the contractor the only person able to complete the work? It should be possible in theory for the employer to substitute one contractor for another.
> Is the contractor obliged to accept work offered to them by the employer and, equally, is the employer obliged to offer them work? If the answer is yes, then they may be seen as an employee. This is called mutuality of obligation (MOO) and is a key test when determining self-employed status.
> Is the contractor providing services just for an agreed project? They may be deemed to be an employee if they are also carrying out other jobs for the employer.
> Is the contractor free to work for other clients at the same time? If a contract states that the contractor must exclusively work for the hirer, then they could be seen as an employee by HMRC.
HMRC may also look at other things that could point to a person being self-employed and therefore a genuine contractor, such as:
> Contractors will often use their own equipment.
> Contractors usually have professional indemnity insurance to cover for any errors made during their work.
> Contractors are usually paid for specific projects, rather than receiving a set amount on a regular basis.
> Contractors remain separate from the employer’s organisation. If, for example, they are in charge of people, they could be deemed to be an employee.
> Contractors are self-employed people who run their own business. A sure sign of this is if they have their own company website, an office or staff.
People or employers can check a person’s employment status through HMRC’s employment status for tax (CEST) tool.
What to do if you’re unsure?
If you’re unsure about your own status or that of someone you are contracting to do a job, you can have your contract reviewed by a professional. This can take the form of a general review of the contract and proposed amendments, or a more thorough and detailed review which looks at both the written contract as well as your company’s working practices.
You could also look at taking out an insurance policy that would cover any risks of non-compliance with IR35. This includes a defence-only policy which would cover your fees for hiring an expert to deal with an HMRC review, or a comprehensive policy which will cover your legal expenses and any liabilities incurred should there be a dispute about IR35 compliance.