The complex IR35 rules regularly cause confusion for businesses and contractors alike, but an amendment to the regulation threatens to throw even more complexity into the mix.
If you’re a contractor or a business which employs external workers, this could impact you, but there may be a more pressing question on your mind.
Let’s start from the beginning…
What is IR35?
In 2000, the UK government introduced IR35, which was designed to tackle what they referred to as ‘disguised employment’.
Put simply, that was to sniff out businesses that pay external workers as contractors even though, to all intents and purposes, they’re actually operating as employees.
For instance, if Dave provides outbound sales services to Company A, and they’re his only client, he might fall foul of IR35 if he works consistently from their office and uses their equipment. Because, let’s face it – that sounds a bit like an employee of Company A, doesn’t it?
This practice that went against IR35 rules was favoured by some businesses and contractors because it offers tax efficiencies for both sides.
How is IR35 changing?
The government is looking to extend IR35 to the private sector by making medium and large firms in that arena responsible for determining the tax status of contractors.
This new rule is due to come into effect in April 2020, but it has caused something of a stink among business owners and accountants – and that shouldn’t come as a surprise to HMRC.
Why is this a bad thing?
Let’s defer to Lilly Aaron, policy manager at the Association of Chartered Certified Accountants ACCA Europe.
“On the surface, this legislation aims to tackle contrived working practices that may disguise the true nature of the relationship between a worker and client,” she explains. “In practice, however, this reform could create a complex web of new rules and liabilities throughout supply chains, causing confusion over employment status and where tax liabilities rest.”
The ACCA have subsequently asked for a delay to the expansion of the legislation. In their mind, by giving everyone another year to appraise the new rules, the HMRC will have enough feedback and time to consider the best way forward.
In April 2017, IR35 was introduced to the public sector to deal with off-payroll workers. It was met with a great deal of media scrutiny, as you’d guess – not least because it focused on working practices within government departments, The BBC, and the Police.
Whether or not it was introduced too soon is open to debate, but Aaron is quick to point out that “there are a lot of lessons to learn” from that particular episode before something similar happens in the private sector.
What else is wrong?
The concern raised by the ACCA over IR35 isn’t new and follows several logged issues relating to the legislation.
They’re also concerned the off-payroll arrangements required by HMRC are too complex. And then there’s the Check Employment Status for Tax (CEST) assessment tool, whose accuracy has also been called into question by the ACCA.
What happens next?
HMRC has recently closed responses to its April 2020 off-payroll working rules, and that will doubtless leave the government with plenty of food for thought.
If no further changes are announced, we should all expect the IR35 rules in the private sector to mirror those of the public sector.
It’s a complex matter, but we’re here to offer guidance. If you have any questions about IR35, give us a call – we’d be happy to help.