New off payroll rules for public sector contracts have caused chaos in the small business community
Disguised employment is an issue that has long challenged government. 17 years ago, the solution adopted was the Intermediaries Legislation, commonly referred to as IR35. It has proven to be deeply flawed and it led to creation of IPSE, which formed in opposition.
IR35 was designed to prevent people from saying they were operating as a business, while in reality behaving like employees, in order to pay less tax. However, the result has been large numbers of genuine business relationships being questioned, putting a great deal of stress and significant financial burden on people who would have to wrangle with the complex rules and would often find their IR35 status challenged by HMRC.
Plus ça change, plus c’est la même chose
On 6 April, things changed for significant numbers of people who work though their own limited company. There are two major changes:
1. It used to be individual contractors would have to consider the IR35 status of their engagements – it still is that way in the private sector. But if you contract for a public sector organisation, you are no longer responsible for determining status. From 6 April, this determination will be made by the client or agency that pays for the service.
2.If the client or agency decides IR35 does apply, tax will automatically be deducted at source, as it for employees.
The government has stated that this is the best way to stop what it believes is wide spread noncompliance with IR35.
It’s important to note that the rules themselves are not changing. IR35 status still depends on factors like whether the right to send a substitute exists; whether there is a mutuality of obligation with the client; and whether the worker has control over their work – among other indicators. The only thing that is changing, and only in the public sector, is the responsibility for considering such factors is shifting up the chain.
But this change is having significant impact. So significant in fact it has prompted large numbers of genuine contractors to down tools and walk away from projects. Public sector bodies such as the NHS, the MOD, the police force and hundreds more have seen vital technicians leaving mid-project, leaving them struggling to deliver on schedule and on budget.
The reason for the walk outs is the not unreasonable concern that public sector bodies won’t be able to make the right call, which could lead many genuine business relationships being mischaracterised as an employment relationship. IR35 is so complex, and public sector bodies and agencies are so inexperienced in dealing with it, it is more or less inevitable that wrong determinations will be made. Moreover, there is a clear incentive to declare engagements as ‘inside’ IR35 as it removes the risk of being lumped with a huge tax liability should it later be found engagements were wrongly assessed as being ‘outside’ IR35.
The evidence coming in is painting a picture of chaos and uncertainty. A number of public sector bodies have informed contractors, sometimes via an agency that they have three options:
1. Move on to the payroll
2. Accept IR35 status, whereby they would be expected to cover an additional 12.5% in costs (more on this in a moment)
3 .Operate their business through an umbrella company.
An option that wasn’t present was allowing contracts that would place work outside IR35. Imagine you have a contract that clearly places you outside the scope of these rules. Why would or should you accept being placed in a new situation, which not only clouds your employment status, significantly increases your tax liability and leaves you open to further investigation by HMRC?
Many of those willing to reluctantly accept the new ‘inside’ IR35 terms are being asked by agencies to take a pay cut of around 12.5%. This is to cover the employers’ National Insurance Contribution which now exists because the engagement is being taxed as if it were employment. IPSE ‘s advice on this is that there is nothing in the legislation which means the contractor should have to shoulder this cost, so you would be well within your rights to resist it. However, it may in the end come down to a commercial decision that only individuals can make – do you want the work and are you prepared to accept the terms? If so, take the hit and move on, if not, refuse the contract.
One final thing worth mentioning is the very recently published Finance Bill contains an additional obligation for the contractor that wasn’t in the draft Bill published at the end of last year. Contractors must now tell the entity that pays them, typically an agency or the client, whether they have ‘a material interest’ in their limited company. In other words, whether you have a significant shareholding (probably anything over 5% would be considered significant) in your company. For IPSE members the answer will almost always be ‘yes’.
This is to enable the client / agency to know whether or not they need to consider the IR35 rules. If the information is not provided, then it will be assumed that a material interest exists and the client/agency will go on to consider whether IR35 should apply.
What can you do?
One thing you can do is make use of the recently published online assessment tool. It came very late to the party – appearing only on 2 March – giving those affected, agencies and clients very little time to get to grips with it before the implementation date came to pass. However, HMRC has stated that it will abide by the determinations made through the assessment. So, if you have a contract with the public sector, take the test. Show your results to your client and/or agency to make sure they agree with the outcome and agree a new contract which reflects the outcome of the determination.
A word of caution HMRC have said that the online tool remains a work in process and they will most likely update it over time, so the result you receive if you take the assessment now is not necessarily going to be replicated if you check again a year from now.