Budget 2018 - IR35 changing in the private sector

Rebecca Seeley Harris explores the changes announced in the Budget to the rules for off-payroll working (IR35) in the private sector.

The much anticipated announcement has been made that, as expected, IR35 in the private sector is to be brought inline with the rules that currently apply for public sector contracts.  So, HMRC has finally achieved what it set out to do back in 2000 at the inception of IR35 but, some 20 years later in April 2020 when the measures will be introduced.  Now the engaging businesses will become responsible for assessing an individual’s  employment status but, only where the engager is a medium or large business.

Which contracts?

Firstly, it will be important to understand who will get exemption as a small business. The revised IR35 rules will not apply where the engaging business is ‘small’ but, it is not yet known how the government will define ‘small’.

The standard EU definition of a medium sized business has fewer than 250 employees, a turnover not exceeding €50m or a balance sheet total not exceeding €43m.  The UK Companies Act 2006, has a similar definition but, what is likely is that those businesses with fewer than 50 employees will be exempt from the new rules, although the existing IR35 rules for the private sector will still apply.

CEST to be improved

In order to determine the status of the individual, HMRC has stated that it will continue to use the CEST tool (Check Employment Status for Tax) but to work with stakeholders to improve the tool and to give further guidance before the reform comes into effect.  One of the main problems with the CEST tool, however, is the lack of information or understanding that the person using it has.  The person inputting the information on the client site does not usually have specific information from the contractor and so can produce an incorrect output of deemed employment. 

The CEST tool itself has also come in for much criticism and it is doubtful that a digital tool can be foolproof when it is attempting to codify case law.  In a recent unreported case at the Employent Tribunal the judge is said to have criticised the CEST tool and disputed its findings.

In response to the consultation on IR35 reforms, HMRC has confirmed that the changes will not be retrospective and that HMRC will be focusing their efforts on ensuring compliance rather than focusing on historic cases.  It is good to know that HMRC will not be carrying out targetted campaigns into previous tax years, so deciding that existing contractors are within the rules will not automatically trigger an enquiry.

As always, there are likely to be repercussions or unexpected consequences.  I should imagine there will be more cases of unlawful deductions of wages taken to the employment tribunal.  It is a win-win for the contractor because it is free to take a case to the ET and if they lose the case because they are neither an employee nor a worker, they get the ideal evidence to pursue HMRC for a tax refund as self-employed.  There is also likely to be a new industry of fee paying companies providing deemed payment services where these can’t be done in house or on payroll.

Whatever evolves between now and April 2020, the compliance burden will be increased but hopefully the government will have found the solution to the employment status question, the subject of a previously unanswered consultation, otherwise businesses will be solely reliant on CEST.

A further consultation should be expected on the detailed operation of the reform.  This consultation will inform the draft Finance Bill 2019-2020 legislation, which is expected to be published in Summer 2019.

First published on AccountingWeb: