IR35 reforms ahead for the private sector

IR35 has been with us for many years and was designed to remove the tax advantages of limited companies for ‘deemed employees’. However, HMRC has failed to adequately enforce the rules since its introduction.

Earlier reforms

In April 2017, the public sector saw a shift in the compliance burden from contractors to their clients and agencies. Typically, this resulted in contractors being given ‘false employment’ status and overtaxed. The public bodies were given virtually no time to prepare and understand the IR35 rules, so they could not make a proper assessment using established tax rules and principles. As a result, most chose to adopt a 100% risk-free blanket approach by applying PAYE and National Insurance (including Employer’s National Insurance) to the amounts invoiced by the contractor’s limited company, thus protecting themselves from any potential liability in the future.

Negative change

The government has recently released its consultation looking at proposals to tackle IR35 in the private sector and it comes as no surprise that first on the list of possible reforms is enforcing the same changes introduced for the public sector. This would see responsibility for the decision as to whether IR35 applies placed with the end client company and the responsibility of paying the correct tax and National Insurance with the agency paying the contractor’s company for its services. We anticipate that this could have negative consequences.

Timing

It looks likely that the new legislation could come in as soon as April 2019. The consultation closes on 8 August 2018 and can be found here. If you pay contractors, or you are a contractor, we strongly recommend that you read it and respond.

To find out more, please contact Jon Miles.