Background and History
In 2017 HMRC implemented a number of IR35 reforms for ‘off-payroll workers’ in the Public Sector and the stated intention is to now focus on similar enforcement across workers in the Private Sector.
IR35 is not new , in fact it became law in 2000 as part of the Government’s plans to clamp down on the growing use of one-man-band limited companies (PSCs) to provide professional services to clients, where the individual was still working in a manner similar to a traditional ‘employee’, but enjoying the tax benefits of a corporate structure.
In the early years of IR35, HMRC reportedly were only collecting a fraction of the anticipated revenues, and in 2010 the then Chancellor, George Osborne, stated that, as part of the newly announced tax simplification initiatives, IR35 would be part of the scope.
Skipping forward through time, and after a series of changes (such as the introduction and subsequent withdrawal of initiatives such as ‘Business Entity Tests’) in 2016 it was announced that there would be a clampdown on what has become known as ‘off-payroll working’ in the Public Sector.
So, from April 2017 the changes explained below were enforced on all contractors working in the Public Sector, such as those engaged by the NHS.
At the October 2018 Budget, the Chancellor announced an extension of the existing off-payroll working rules to the private sector, effective from April 2020, and announced that there would also be a ‘consultation’ exercise prior to implementation.
Where are we now?
HMRC published the consultation document in March 2019, requesting responses to the proposed Off-payroll Working Rules 2020.
You should note that whilst the stated intention is for implementation in April 2020 the details and mechanics that underpin the new rules are yet to be finalised.
What’s in the new rules?
At a high level, the objective is to level the playing field, in terms of tax and National Insurance, paid between full time employees of a business and contract/temporary/‘off-payroll’ staff who, by the roles they fulfil, are deemed to be performing as ‘full time employees’ of the business with whom they have been ‘contracted’.
Will this apply to all ‘contractors’
No. The rules apply to all people whose job falls under IR35. Therefore, for each role for which you are engaged there will have to be a ‘determination’ made in order to establish whether or not the role falls inside or outside the IR35 framework. In other words, and simply put, is the role (or service) you are providing akin to that being performed by ’traditional’ employees?
HMRC provide an on-line 'Check Employment Status for Tax' tool known as CEST which can determine whether the job you do is inside or outside IR35 by taking you through a series of questions.
If my role is inside IR35 what will happen to my pay?
If you work via an umbrella company, you are unlikely to see any change in your pay.
For contractors working via a PSC, the key financial impact of this change lies in the payment of employment taxation, in particular Employer’s National Insurance Contributions (NICs).
I already account for my tax liabilities within my PSC – so what will change?
If your role is inside IR35, the business for whom you are providing your services will, as the proposals currently stand, have to make employment tax deductions from your invoice before paying you the net balance.
How much will actually be deducted?
Again, we can only work at this stage from the proposals in the consultation papers, and from how things have worked in the Public Sector. The deductions will include:
- Employer’s National insurance Contributions
- Employee’s National insurance Contributions
- PAYE Income Tax
If I’m already in a contract when the changes come in, what will happen?
Momenta is currently in discussion with clients about transitional arrangements and as soon as HMRC have finalised the rules, and hopefully issued guidance on their application following the consultation period, we will take the necessary steps to guide you through any required changes.
Will there be choices?
Depending on the way you currently work, yes there may be. It is worth noting though that the IR35 reforms are going to affect absolutely every contractor in every business sector across the UK as things currently stand.
How will Momenta help me?
Firstly, we will be communicating regularly with all our Associates to both build awareness and knowledge so that everyone is fully informed on developments as we head towards April 2020.
As part of this initiative, we will be launching a series of IR35 roadshow events around the country which all our Contractors will be invited to – look out for dates in your area.
Secondly, we are engaging with our 3rd party service providers, such as the umbrella companies you may already be familiar with, in order to make sure you can get the help and support you need in order to optimise the way in which you manage your finances.
The increased focus on IR35 will impact our business too and we will be looking to ensure that the teams you speak with at Momenta will be able to support you and direct you in the most appropriate way.