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IR35 set to be rolled out into the private sector in 2020
We explore the history of IR35 and what it could mean for the private sector.
It was announced in the Autumn Budget on 29 October 2018 that the reforms to IR35, which were implemented in the public sector in April 2017, will be introduced to the private sector by April 2020. Phillip Hammond announced that the reforms will cross over in the private sector for medium and large businesses.
Here, we discuss the reasons for the reforms. We look at the impact on the public sector since 2017. Plus what it could mean for the private sector when the reforms are introduced in April 2020.
What is IR35?
Implemented in April 2000 as part of the Finance Act by Gordon Brown, the IR35 legislation was introduced to ensure that regular payments of National Insurance and PAYE taxes were paid by personal service companies.
The legislation was implemented so that the government could tackle the problem of ‘disguised employment’. Where organisations engage workers on a self-employed basis and usually through an intermediary, such as a limited company, rather than through an employment contract.
Organisations using contractors or freelancers in this way aren’t liable for national insurance and PAYE taxes, the taxes associated with employees, and contractors operating in this way forgo any rights and benefits associated with employment.
In this arrangement, PAYE and NI payments sit with the limited company or intermediary supplying services to the company, usually set up by the contractor.
Reforms to this legislation hit the public sector last year and with it shifted the liability to the hiring organisation who procure the services of the intermediary or limited company.
Why have reforms been implemented?
HMRC consider that ‘disguised employees’ are those workers that HMRC believes would be an employee of the client if they didn’t work through an intermediary – and therefore should be taxed as an employee.
HMRC defines someone as self-employed as being someone who works for a fixed sum, can decide where they choose to complete the work and submit invoices for services provided, amongst other criteria. Where HMRC takes issue, is with flexible resource performing services in a way would class them as an employee.
For instance; a contractor hired for a two-year statement of work performing business as usual risk activities for a large scale financial services company.
Turning up to the same office every day, working fixed hours and contributing to the BAU team could be seen as an arrangement that perhaps should be on the payroll.
It’s easy to see how the lines have been blurred given the rise in this type of self-employment model over the years. After a HMRC enquiry, the public sector saw reforms to this legislation. This means that the hiring organisation, receiving the service from the contractor or freelancer, is now responsible for determining the IR35 status of its freelance workers and contractors, and deciding if they fall inside – or outside of IR35.
How has this affected the public sector?
Since April 2017, when the reforms were introduced to the public sector, there have been widespread reports of talent loss in the sector, with many departments losing their top talent. The NHS is particularly affected, with reports stating that 25% of NHS departments have lost half of their flexible and freelance talent, posing real commercial risks to productivity and delivery.
It’s also been reported that contractors and freelancers wishing to stay self-employed, within IR35, have been proposing higher day rates to compensate for the additional liability they face, or risk losing as much as 20% of their take-home pay.
With dissatisfaction on both sides because of the reforms, it’s clear to see that it hasn’t been easy for both organisations and the freelancers and contractors working within the sector.
The process that public sector organisations have undertaken since the reforms were announced saw a huge review of their contractor and freelance base. Organisations set about determining IR35 status through assessment tests for their contractors and freelancers, under much scrutiny and several disputes between the affected parties.
As a result, it's been reported that this has some additional £475m taxes have been collected by HMRC since the implementation of the reforms.
How will this legislation affect the private sector?
Organisations are already predicting skills shortages and increasing costs, let alone the administrative burden of having to assess contractors and terms of employment during a time of uncertainty with Brexit around the corner.
The Association of Independent Professionals and the Self-Employed (IPSE) states that the reforms will 'punish the overwhelming majority of genuine self-employed people'. Contractors and freelancers will start to look at ways to remove financial constraints they would face should they continue assignments with organisations and sit inside IR35.
This includes fee raising for individual services, which as we’ve discussed has been the cause of some disputes in the public sector and in some cases, has resulted in an interruption in service delivery. There's no doubt that the public sector has struggled with the reforms since April 2017. HMRC has a wealth of information and self-assessment tools for contractors, but the legalities of what actually constitutes an ‘employee’ means that there has been a heavy burden of legislation review on the side of the hiring organisation.
The private sector and hiring companies will need to start a review of their freelance and contractor base to understand the scale of remedial activity that needs to be undertaken.
Now that we know that IR35 reforms will be introduced into the private sector in April 2020 organisations and contractors need to understand their position and work together to find a resolution.With far-reaching consequences affecting HR and payroll – and the very resource needed to deliver change within organisations, IR35 reforms could very quickly affect business-critical programmes in the private sector.
What do we think?
The reforms are now being implemented in the private sector raising considerable risks to BAU and service delivery if you rely on contractors to perform services. HR and employment law specialists will need to look closely at current contractor and freelancer resources to understand the types of their engagement and determine IR35 status. April 2020 is just under 18 months away, now is the time to start thinking about alternative resource models that can provide flexibility.
