They’ve only gone and blown the bloody doors off!
How did this all start?
Last week the government announced that they would be ploughing ahead with their plan to implement changes to IR35 rules in the private sector.
IR35 has been with us for over 20 years and during that time showed itself in a variety of ways tackling first the construction sector then moving across a range of other sectors. However, as legislation is was a resounding failure as IR35 required the taxpayer to consider and assess their own status and to apply the more punitive IR35 tax structure if the work relationship was closer to that of employment.
In a complete shock to everyone at HMRC, hardly any of the proverbial ‘turkeys voted for Christmas’ and this was the status quo until April 2017.
Game changer – #1
In April 2017 HMRC implemented game changer number one, instead of the taxpayer assessing their own status, the requirement would be on Public Sector organisations to assess the status of their contractors and to apply the correct tax regime. Going one step further, this also made the Public Sector organisations responsible for the tax if they incorrectly assessed the status.
Being risk adverse, many organisations in the Public Sector simply recruited many contractors who wished to take employment and save many leave the sector. This brain drain affected many organisations ability to deliver projects & contracts on time, most famously HMRC’s own IR35 team.
This single change of moving the onus from the contractor to the organisation resulted in the biggest IR35 impact so far…..but they are at it again!
Game changer – #2
HMRC announced that the same regime would now apply to the private sector from April 2020 with the more detailed guidance being released in the Summer on 2019. Unsurprisingly, this looked almost identical to the Public Sector rules which caused so much chaos for that Group.
The key point was for the main contractor/employers to perform an individual assessment of each person’s work status and to issue a report setting out how they were to be retained post April 2020 with the 3 main options being unaffected, engaged inside an IR35 compliant contract or employed.
What’s the word on the street?
It was all very quiet throughout 2019 as most main contractors/employers sat back to see how their competitors would handle things so as not to be the first one to break ranks and inadvertently start a brain drain. There were a couple of notable exceptions (HSBC for example), but saying nothing seemed to be the order of the day.
2020 has seen much more action with a range of firms across a range of sectors approaching the issue in this way;
- Little or no offer of employment – We have seen the odd one, but these have been on fixed term contracts and do not include the normal employment perks.
- Little or no continuation of existing contracts – We have clients who are challenging their assessment as (rightly) they have contested that the assessment was flawed and did not accurately assess how they worked as an individual.
- Umbrella companies – By far the biggest push is to encourage people to engage with umbrella companies so there is no direct link or relationship with the main contractor/employer.
The use of an umbrella company is not attractive as it is essentially an ‘inside IR35’ arrangement which has the following effects;
- You become liable for both employees and employers National Insurance
- You are unable to claim expenses such as travel, accommodation, tools and equipment.
- You are unable to share your income with your spouse as payments are made to you as an individual, not your company of which your spouse may be an employee or shareholder.
- There is a weekly processing fee of approximately £20, so around £1,000 per annum.
We estimate that the use of an umbrella company will result in a reduction of income of approximately 20%
So how do we see this playing out?
At the moment it does look like the things are heavily stacked against you, which to be fair they are, as our fear is that many organisations will simply drop this on you at the last possible moment or will insist on the umbrella route as a fait accomplice.
However, commercial reality will prevail as many contractors leave the sector, take breaks or seek alternatives in the short term. This reduction in capacity will force organisations to take a more pragmatic approach to the new legislation but we anticipate rates rising and the return to direct engagement of your own limited companies in due course.
But this will take time…
If you are concerned as to how these proposed changes may affect your business then please get in touch at firstname.lastname@example.org or alternatively contact the office on 01302 752700 so we can get you booked in.