As we end 2019 with political stability, it also brings clarity to IR35 / off-payroll working. Despite Sajid Javid’s election promise to review the implementation, it’s almost a given that we’ll see off-payroll working land in April 2020. Let’s recap what these changes mean.
Why is HMRC introducing off-payroll working in the private sector?
Currently, you, as a contractor or consultant, get to assess your own IR35 status. And it’s a decision that matters. If you’re outside IR35, you can enjoy the full flexibility of running your own service business. If you’re inside, you’re taxed as an employee, with all the deductions and none of the benefits.
Whilst you may get an expert to help you determine your status, it’s ultimately your decision. And if you get it wrong, HMRC will hold you to account and will demand you pay back retrospective taxes, as if you were an employee (not that HMRC has a great track record here – more on that shortly).
HMRC believes that too many contractors and consultants are getting this wrong and are claiming to be outside of IR35 when they’re not, and shortchanging the Chancellor along the way. HMRC has chalked up a figure of £1.2bn per year for these tax losses. With such a large figure at stake, you can understand why they’re so motivated to see IR35 implemented correctly. (This figure, as you would expect, is widely disputed).
How many contractors and consultants are impacted?
According to HMRC, two-thirds of contractors and consultants are correct in their outside IR35 decisions. Of the remaining third, 90% are claiming to be outside IR35 when HMRC thinks they should be inside IR35. This is the group HMRC is targeting with this legislation, and the number of contractors impacted stands at 170,000.
What’s changing in April 2020?
The main changes are:
- Your client, not you, will now determine your IR35 status. They’ll do this by providing you with a written “Status Determination Statement” (SDS) for your engagement.
- If you don’t agree with the status, you have the right to appeal to the client, and they have 45 days to respond to you.
- The client and the agent, not you, are on the hook for any tax liabilities from an incorrect decision
- That’s right: if you’re working outside IR35 and HMRC investigates and decides you’re actually inside IR35, then your client and/or agent will be liable.
- To help clients assess IR35 status, HMRC has developed an online tool for them – the “Check Employment Status Tool” (CEST)
- The tool, however, is deeply flawed and is stacked in HMRC’s inside-IR35 favour – we’ll cover this shortly.
- If you are deemed to be inside IR35, you used to get a 5% tax-free allowance for accountancy/umbrella fees. This allowance will be removed.
- The above only applies for ‘medium and large’ clients (as defined in the Companies Act 2016). If you’re working with smaller clients, the rules remain as they are today – and you’ll continue to determine your status.
If you’re confident of your outside IR35 status, and your client has the resources to conduct individual assessments, then off-payroll legislation can be positive: it will bring you clarity and shift liability away from you.