IR35 Changes. What does it mean?
It’s safe to assume that anyone operating as a contractor right now has stumbled across the ominous, alphanumeric combination of IR35. However, it’s not entirely clear that everyone has a firm grasp on the ins and outs of the IR35 changes; what it means for companies and contractors alike.
So here is your complete guide to IR35, both for consultants and companies.
IR35. Some context
IR35, or Intermediaries legislation, was introduced in 2000 as a way of identifying “disguised employees” working through PSC’s (Personal Service Companies). It would be fair to say that, in its original guise, it failed to do what it was originally introduced to do. So, as part of the budget in 2015, the government announced plans to reform the legislation. The projected costs of non-compliance in the private sector was expected to reach £1.3bn by 2023/24 if changes were not introduced.
Following various consultations between 2015-2017 the new rules came into effect in the public sector in 2017. The next stage is to role this out across the private sector which will commence in April 2020.
What are the proposed changes to IR35?
There are a number of changes that will come into force in April, but the principle difference is where the responsibility lies for identifying if a contractor falls inside or outside IR35.
This responsibility now lies with the end user of the contractor’s services. If the end user determines that the contractor does fall within IR35, it becomes the responsibility of the fee payer, be that the end user, a recruitment agency or third party to pay the associated tax and National Insurance Contributions (NIC).
As is always the case with such radical reform there has been considerable opposition to this and calls for all political parties to review the legislation as part of their manifesto in the upcoming elections. However, given the process has already been implemented throughout the public sector it would be surprising if there were any material changes to the legislation before it’s role out in April.
What falls in or out with IR35?
There has already been some movement on this by a number of larger operators, many of whom are taking a blanket approach.
For instance, The Royal Bank of Scotland (RBS) have told all contractors that they must transfer to either the Pay As you Earn (PAYE) system or to an umbrella company by February 2020. This followed HSBC, Barclays and Lloyds in October.
One caveat to this is that, at the moment, the changes to the legislation only apply to those working for medium and large organisations. If your organisation meets two or more of the following criteria, then the contractors who work for you are will continue to comply with IR35 in it’s current form;
- Have a turnover of £10.2m or less
- A balance sheet total of £5.1m or less
- 50 employees or less
The main focus for the legislation is to make a clear distinction between the role of an employee and that of a contractor which has become decidedly blurred in recent years. This isn’t always easy to define so here are a few instances that might help you understand your position.
Within your contract you should have the right to provide a subsititute, paid for you, for the services you deliver. Your client should not have the right to reject you sub-contracting out the work. If this is the case you are in a good position. If, however, you and only you are required to carry out the work then this will certainly count against you.
If, as a contractor, you are free to come and go as you please working wherever you want to and working to your own rules and regulations then this will support your case for IR35. If your hours, days and tasks are regularly appointed by someone within the organisation, this is more in keeping with an employee.
Mutuality of Obligation
The contractor is in no way obliged to take on work offered and likewise the client has no obligation to offer work to a contractor.
As a contractor, you should provide all your own tools, equipment and training to undertake the role.
The risk in terms of training, improving skills, meeting deadline payments or unsatisfactory work should lie with the contractor. If there is no financial risk on the part of the contractor for the success of the project, then this will hinder a contractor’s ability to operate outside IR35.
A contractor cannot benefit from any employee benefits such as sick pay, holiday pay or maternity pay. This includes partaking in social events and benefiting from employee facilities.
There should be a defined end date for contracted services. If the job goes on for an extended period of time or is open ended then this becomes the role of an employee.
Each contract should have a defined termination clause which can be actioned by either party.
Dealing with IR35 Changes
When these regulations were introduced into the public sector it was met with some opposition and there were a few approaches to dealing with it.
- There were a small number who tried to move into the private sector but not all roles were suitable for this.
- Some challenged their agency to no avail given the end user was making the decision and was not willing to move.
- The majority moved to umbrella companies to avoid the ongoing costs and retain the benefits of employment.
- A number of the contractors chose to retain their PSC status and were paid inside IR35 but this presented no real financial benefit and made for some challenging calculations.
- Finally, there were a number that asked for an uplifted rate which was met with limited or no success given the end user was not willing to increase rates at all.
What should you do next?
There are obviously implications for both contractors and companies so here is a breakdown of a few steps you need to take.
- There is going to be some upheaval and it will take a calm head to plan a path through. If you are heavily reliant on contractors, get a firm handle on the law and agree your position as a business – avoid any dubiety amongst departments.
- It is important to start the process as soon as possible and bring in key decision-makers to prepare contingency and an effective change programme. The notion that this legislation won’t be implemented by way of political review is folly no matter who is elected.
- Prepare your position on capacity and whether increased rates can be accommodated.
- Begin your recruitment planning process now and ensure you have a business continuity plan in place.
- Develop an appeal process and identify strict parameters for this.
As a contractor
- It is your responsibility to ask whether the role is inside or outside IR35 and to get written confirmation where possible.
- Get familiar with the law, make sure you have a working understanding of the ins and outs of the legislation (which hasn’t actually been introduced yet)
- Review your business. Do you operate as a Bona Fide small business who market yourselves, have a client base or do you rely on one client and one role?
- Look into potential substitutes that could step in and provide you with an alternative to your provider
- Assess your ability to deliver on a project that exists inside IR35. Could you still deliver on this and is it a financially feasible proposition?
- Fully review the working practices and assess against IR35 legislation
- Seek guidance from expert sources on the best route forward for your business.
Eden Scott and IR35
Eden Scott has established a working group from within our Executive Management team, specialist consultant community lawyers and partner organisations to ensure we provide our clients and contractors with the best possible advise as we all navigate what is a challenging situation.
We are planning to meet with all clients over the coming weeks to establish what actions they are taking, to understand their individual stance on the legislation and continued use of PSCs to deliver contract services and to advise all PSC contractors accordingly. In all instances, Eden Scott are committed to maintaining the highest quality of service provision and keeping all stakeholder groups up to date with the impending legislative changes.