Confusing IR35 legislation has long plagued contractors in the UK.

Ambiguity around HM Revenue and Customs’ methods of judging employment status has led to a huge number of cases being taken to the employment tribunal – often resulting in HMRC’s initial IR35 rulings being overturned.

What is IR35?

IR35 is a piece of legislation designed to prevent tax evasion by self-employed workers.

Those working through their own limited company enjoy many more tax benefits than normal employees and this is why HMRC uses IR35 to stop what they claim are instances of ‘disguised employment’.

A full-time employee can essentially leave work on a Friday and return to their desks on Monday morning as limited company contractor carrying out the same job. This changed situation means that the former employee pays a lot less tax than they did and their employer, now client, also saves on National Insurance Employers’ Contributions and the requirement to obey employment laws.

IR35 enforcement is a constant game of “cat and mouse” where the goal is to find those contractors who they claim are disguised employees in order to pay the tax HMRC claims that they owe. If caught by IR35, HMRC can then investigate previous contracts for the last seven years and, in special circumstances, as far back as 2000 to total the amount of tax a contractor is alleged to owe.

One of the issues with IR35 law

Since IR35 first began back in 2000, those working through their own limited companies have been responsible for defining their own employment status.

This is where a lot of the trouble for HMRC arises. Someone can draw up their business contract for their client stating that they are self-employed and there to provide a particular service. This tends to make very little difference to the company as they still get the service they’re paying for yet both they and the contractor receive considerable tax benefits.

Should the worker come under investigation, HMRC inspectors start from scratch to work out whether they believe the client-contractor relationship is more like an employee/employer relationship.

If found to be caught by IR35, a contractor is made to repay all of the tax they owe with penalties. HMRC believe that too many contractors are not properly declaring so they decided to change the rules – and this had some dramatic consequences.

The big problem for HMRC is that they don’t have the time, resources, or manpower to pursue the 15% of the UK population now self-employed.

What is the latest IR35 reform?

From April 2017, public sector organisations are required to assess each of the agreements they have with their contractors to work out whether those agreements mean that the relationship falls within IR35 or not. Previously, this was the responsibility of the contractor themselves.

Lest they receive a large fine from HRMC, contractors are now reporting that many public sector clients are erring on the side of caution. Public sector clients are overwhelming choosing to declare their arrangements with their contractors within the scope of IR35.

The difference between being outside the scope of IR35 and within its scope can be as much as 20-25% more of a contractor’s earnings paid in tax.

Expected new IR35 reforms will now extend the same rules to all private sector contracts. This has caused a lot of worry and upset to contractors as well as to their clients.

When will the private sector reform be implemented?

In their minutes from December’s IR35 forum, HMRC identified a “growing and immediate Exchequer risk” because of non-compliance in the private sector. This has led many to believe a change in the private sector is imminent.

HMRC have said that the previous IR35 reform greatly increased compliance in the public sector with 90,000 more on-payroll workers within the public sector than expected. They have described this as a great success and they are determined, it would appear, to roll it out even further.

Experts believe the changes will be confirmed in this year’s Autumn Budget with the legislation going live from April 2019.

If your business currently deals with contractors, then the IR35 reform may mean significant additional costs to you on your business-critical tasks if you bring outside help in. If you have any questions about the new reforms and you would like to know how to ensure that the relationship you have with your contractors is outside the scope of IR35, please speak to the Burton Beavan team today. Please call us on 01606 333900 or email hello@burtonbeavan.co.uk.