Changes to IR35 – how it affects contractors and agencies

With changes to the IR35 rules coming to force in April 2020, contractors that provide personal services through their own company, as well as agencies providing contractor services, will be affected and need to understand the new rules.

For contractors, it’s going to be crucial for them to understand whether their working relationships are affected by IR35 and how this will affect, or more to the point, reduce their take home income. 

We can also expect more enquiries from HMRC into the tax affairs of contractors who provide their services to small businesses and organisations, where the contractor themselves has the IR35 decision making burden levelled on them.

It is worth noting that the new and old IR35 rules will operate side by side from April 2020 and this does present something of an issue, as an individual providing services to a client/customer may not be aware whether their client/customer is a small, medium or large organisation for the purposes of IR35 and this conclusion will determine who is responsible for policing IR35. 

As a matter of course, it would therefore be sensible for contractors to ask all their clients/customers for confirmation that they are a medium or large organisation for the purposes of IR35.

In theory, this all sounds relatively simple, when in fact it is anything but, and the logistics of who makes the decision as to whether a contractor is caught by IR35, how this information is communicated, and who carries responsibility for collecting the taxes and paying them over to HMRC is complicated.  Simply making the initial decision as to whether IR35 should apply is difficult, which is a decision HMRC often gets wrong. 

For example, recently, television presenter Lorraine Kelly defeated HMRC at an IR35 tribunal and successfully appealed against a £1.2million tax bill.  Not long before Lorraine’s success, HMRC gave up on a three-year IR35 enquiry which saw them drop a £59,000 tax payment alleged to be owed by an IT contractor. 

Indeed, since 2011, HMRC has lost nine of the twelve reported IR35 cases taken to tribunal, two further cases delivered a split verdict and HMRC won only one outright, a success rate of only 8% for HMRC.

In addition, agencies providing contractors to third parties must act now to understand how IR35 will affect them.  Agencies could end up with a far greater administrative burden and a monetary cost as a result of IR35, both of which need to be considered now.  In addition, agencies will also need to consider how they will deal with SDSs, for example we may see contractors challenge their client directly over an SDS and if their Status is changed how will the agency find out?

Perhaps the biggest problem businesses and contractors will face is determining employment status, as the tests are not black and white, and they cannot rely on the contractual terms of an engagement, but instead have to also consider the real-world facts of each assignment in which a contractor is involved. 

The CEST tool provided by HMRC is due a makeover, which will help, but when this will be forthcoming, we do not know, although we’re not holding our breath as Governmental IT resources are still heavily focused on Brexit.

These are all things we can help contractors with, particularly the Status Determination, but they need to be started now whilst we have at least six months before the changes take effect.

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