You may feel like you’ve been hearing about IR35 reforms for years – and you’d be right. Despite numerous delays of its rollout in the private sector, IR35 reforms have been rumbling on for the past 4 years.
Introducing the legislation hasn’t all been plain sailing – it’s survived Brexit (so far), a scathing lords report, two separate 12-month delays, and now a pandemic related economic downturn.
With everything going on in the economy at the moment, you might expect a further delay to be incoming. However, in the summer of 2020, MPs voted down a bill to delay the rollout to 2023/24 by 317 to 254.
So, in April 2021, the new IR35 rules will be back. And, here’s what you need to know to make sure you’re ready.
What is IR35?
IR35 isn’t new. Contract employment regulations currently contain IR35 provisions designed to stop off-payroll contractors working in the manner of an employee.
Contracts of engagement for any contractor services in the UK should already include clearly outlined deliverables and a finite time limit on the engagement. This mitigates the chances of HMRC deeming a contract inside IR35.
Under current rules, the contractor (or agency through which the contractor is engaged), decides the employment status. However, under the new regulations, the emphasis moves to the end-user, i.e. the company using the contractor’s services. If a contractor is deemed inside of IR35, the company must deduct tax and national insurance from fees paid to HMRC.
IR35 reforms rolled out in the public sector in 2017, so it’s been a long and often rocky road to get to this point.
What’s all the hubbub about?
When IR35 changes came to the public sector in 2017, it wasn’t exactly plain sailing. Most notable was the lack of clarity around employment status criteria and concerns around HMRC’s ‘Check Employment Status Tool’ (or CEST, as it’s known).
While the government insisted the tool is a guide and not designed to be 100% accurate, but estimates suggest CEST incorrectly categorised over 110,000 contractors. The uncertainty this created led to many public sector organisations blanketing all their contract positions as ‘inside IR35’, reducing contractor numbers, or, in some cases, both.
In 2018, a report by the CIPD and IPSE called the public sector IR35 reforms “deeply flawed,” and warned against the “damaging unintended consequences,” the changes had brought. Their research found that a year after the implementation of the IR35 reforms, 51% of hiring managers felt they had lost access to skills as a result of the changes.
While part of this loss of skills was public sector contractors saying, “sod this, we’re off to the private sector” – something not possible this time around – there is still a concern that the IR35 rollout in the private sector will see contractors leave the market altogether.
While it’s true that the contractors leaving may become potential permanent employees, locality will play a much higher factor in the recruitment of these skills. Contractors currently travel across the UK, staying away from home during the week. This will be less likely as a permanent employee, so finding those skills in the local area becomes more critical and could have a disproportionate effect on companies outside London.
Given there have been four years since the implementation in the public sector, you would think that sufficient time had passed to iron out the issues and improve CEST. However, doubts around CESTs reliability persist, and a recent Lords sub-committee report stated the government had “severely underestimated the costs to business of implementing the changes.” It warned of “unintended behavioural consequences,” that would disproportionately affect the labour market. You can read the full report, here.
Is my business affected by IR35?
From April 2021, IR35 reforms will apply to any public and private sector companies that meet at least two of the following conditions:
- you have an annual turnover of more than £10.2 million
- you have a balance sheet total of more than £5.1 million
- you have more than 50 employees” (Gov.UK guidance)
So, if your company is medium or large, chances are you will meet two of these criteria. It’s also worth noting that if you are the subsidiary or associated company and your parent company meets the criteria; you will also have to apply the off-payroll working rules.
If you don’t meet two or more of the conditions set out above, and you aren’t a subsidiary of a company that does, your company will continue to operate under the current rules governing IR35.
How do I prepare for IR35?
A survey conducted last year by Contractor Calculator showed that only 18% of private sector organisations had started preparing for the changes to IR35. It also found that 17% were unaware of the upcoming changes.
One Covid-related delay later and we are at a similar timeframe before the changes are due to drop – I wonder if those numbers have changed much? With many staff on furlough, and attention firmly focused on post-pandemic recovery, I wouldn’t be surprised if IR35 changes were still low on the list of priorities.
But, if there is one thing the pandemic has taught us about our economy – it doesn’t cope well with uncertainty. So, preparation will be critical to a smooth implementation and embedding of IR35. Here are some steps you can take:
1) Start by auditing your contractor supply chain – how are they operating? Are they working through their own limited company or an umbrella company? Do you engage them through an agency?
2) Start using the CEST tool to check your existing contractor base. Remember that this is still not foolproof, so seek clarification from experts or HMRC if needed.
3) What are the financial implications of any status changes? Will you have to reduce your contractor numbers? If so, how can you start planning for permanent recruitment?
4) Look at your existing contracts that govern the use of self-employed contractors. Are they fit for purpose? How can you make sure they adequately display the difference between an employee and self-employed?
5) Talk to the contractors who may be affected by the changes. Let them know what is going on throughout the process. The changes will likely be an unsettling time for many of them, so giving more time to prepare for a possible change of status could help you retain more skills after April.
6) Examine your internal structures to deal with this change. Do you have someone responsible for heading up the implementation? Are your processes fit for purpose? Do you need to find any external training to equip staff adequately to deal with the change?
Will IR35 actually happen this time?
Well, that’s the million-pound question. The government seem pretty insistent that it will. Although, between now and April 2021, UK businesses are going to have to weather what looks like a pretty tough recession. Add into the potential mix fallout from the end of the transition period and a possible no-deal Brexit, and who knows? We could be looking at a further delay.
The fact that 13 Conservative MPs were recently willing to defy a 3-line whip and vote against the government for a further delay means it may not be as cut and dried as Rishi would have us think. The last few years have shown us that seven months is a long time in British politics. Whether the changes come in 2021 or 2023, they will be back. And, companies will need to prepare for changes as best they can. Starting to plan and investigate as early as possible will ensure you know what your off-payroll obligations are and how to implement them with minimal disruption to your business.