New IR35 rules still on track for April 2020
The government has been trying to crack down on ‘disguised’ employment for almost two decades. Now revised rules for agency-employed contractors will change how self-employed status is decided.
If you’re a contractor or freelancer, you’ve probably heard that fast-approaching changes to something called ‘IR35’ will likely to affect you – but details have been hard to find.
That’s because IR35, also known as intermediaries legislation, can be frustratingly complex. And with significant changes coming into effect next year, the clock is ticking on understanding how it could impact your freelance business.
To help make things easier, we’ve been observing recent developments and considering the impact it could have on our freelance clientele.
Here’s what we know today:
First and foremost, the government has reconfirmed plans to change the rules for off-payroll workers – freelancers and contractors employed through another agency – effective from 20th April of next year.
Draft legislation was published last month to enact Finance Bill 2019-20, which will introduce important changes for freelancers and contractors who work through an intermediary – what HMRC refers to as ‘off-payroll working’.
This will affect anyone working through a personal service company (PSC), recruitment agency, or any medium- to large-sized business in the following ways.
PSC’s no longer determine the IR35 status of a contract
The changes mean end clients are now responsible for determining the IR35 status of any contract with a PSC.
Smaller businesses (as defined by the Companies Act 2006) can seek an exemption if they meet at least two of the following criteria:
- They have no more than 50 employees.
- Their total balance sheet doesn’t exceed £5.1 million
- Their total annual turnover doesn’t exceed £10.2 million
To close any remaining loopholes, the legislation prohibits medium or large businesses from setting up smaller arm’ s-length subsidiaries to procure services from PSCs. IR35 status will be applied to the parent company end client using a calculation that measures the aggregate balance sheet, and aggregate turnover of all its legal entities.
End clients must proactively declare the IR35 status of a contract
The status of a services contract under IR35 must be declared by providing a ‘Status Determination Statement’ or SDS. The SDS has to be submitted in writing to the individual PSC worker and, if an agency is involved in the transaction, a copy must be provided to the agency responsible for payment.
These arrangements place the onus for administering an SDS on the end-client, or fee payer if an agency is involved.
By shifting responsibility for assessing IR35 eligibility over to end contractors, the government expects to add £1.3bn per year by 2023/24 to the exchequer, potentially making it the budget’s biggest revenue raiser.
The 5% administration allowance will be phased out
The current 5% allowance granted to PSCs to meet the costs of administering off-payroll working rules will be phased out under the new legislation. PSCs working with smaller end clients will continue to benefit from the allowance.
End-clients will need to develop their own disputes mechanism
If a dispute arises with a PSC worker about the SDS or their IR35 status, it’s the responsibility of the end-client to make arrangements for resolving it. The legislation doesn’t say how disputes should be mediated; it only establishes a time limit of 45 days for the end client to respond to the worker in writing, after a review of the dispute has been completed.
The government’s free tool for checking IR35 status doesn’t work
To ease the process of assessing IR35 status, the government created a voluntary tool for affected organisations called the Check of Employment Status Tool (CEST). It’s come in for criticism after a freedom of information request uncovered concerns about its effectiveness.
Tests by ContractCalculator found what they describe as ‘wild inaccuracies’. Confidence in the process took a hit as a result, though the government has since said it recognises that the CEST needs to be improved.
It’s expected that further guidance for businesses will be published throughout the second half of 2019.
What does it all mean?
The government has been trying to crack down on ‘disguised’ employment for almost two decades. Intermediaries Legislation (IR35) enacted in 2000 was intended to address the issue of people claiming to provide services to companies as a limited company – but were in fact not really in business for themselves.
Such arrangements have potential benefits for the employee who can use limited company tax rules to minimise their tax bill, and for the contracting business who can side-step obligations as an employer.
Despite several failed attempts to clamp down on the practice, the government announced in the 2018 budget that changes to IR35 which had already been implemented for public sector organisations, would soon apply to the private sector.
The public sector implementation of IR35 was bumpy, and although HMRC claims it has learned lessons, problems with the CEST and the removal of the administration allowance for larger end clients could be portents of more trouble ahead.