We are now 6 months on from the IR35 changes made in the public sector – how time flies when you’re having fun!

It feels to me like we are starting to emerge from the chaos these changes have caused and can take stock to refresh on what the rules mean and the implications they have had.

A refresh on the IR35 changes:

  1. A public sector hirer must assess each off-payroll role and determine whether IR35 applies or not. This assessment must be communicated to the next party in the payment chain before the role commences. If this doesn’t happen then the public sector body is liable for any unpaid tax.
  2. The entity which pays the PSC is responsible for ensuring the correct tax is paid over to HMRC based on the status decision provided by the public sector body.
  3. The contractor must suck this up with no clear route for them to formally appeal the status decision or reclaim any overpaid tax and NIC.

The reaction to this change by the public sector end hirer and most recruitment businesses is to take a risk based approach and apply IR35 if there is any element of doubt regarding the contractors IR35 position. I think this is a reasonable approach to take as significant liabilities can accrue if multiple contractors are being engaged.

There are however still incidents of contractors being deemed to be inside IR35 and therefore having tax and NIC deducted from the payment made to their PSC when it is clear that the role falls outside of IR35. Given the lack of guidance from HMRC on what course of action to take in this scenario, it is up to the contractor to decide whether they should rock the boat at the risk of losing further work or take the reduction in pay on the chin.

Given there is no clear route for a contractor to rectify an incorrect IR35 position, contractors are being tempted back to using non-compliant models to enhance their take home pay. I am seeing an increase in “schemes” designed to avoid employment tax which introduces a new risk to the supply chain, particularly following the introduction of the Criminal Finances Act on 30th September. This was one of the reasons stakeholders argued against this change in legislation – close one perceived loophole in an aggressive / unfair way and many more will open and we are still left wondering how to correctly identify and tax the self-employed workforce.

It seems to me as if there are two other significant issues bubbling away in the background which could put a whole new slant on this issue.

The first being a claim for employment rights from a contractor classified as being an employee for tax purposes but not receiving associated employment rights. Given the abolition of the upfront cost of lodging a claim to an employment tribunal, contractors have nothing to lose financially by testing their employment status in the courts. A document stating that the end client has determined them to be an employee for tax purposes will make it very difficult for the tribunal to conclude that employment rights shouldn’t follow. A successful case could result in the hirer making a more informed decision upfront.

The second being the roll out of these changes to the private sector. The recent publication of July’s IR35 minutes shocked me as they did not represent a true reflection of the discussions had in the meeting. There was no reference to the concerns or issues raised by numerous stakeholders and appears to paint a very rosy picture. Given we are close to the Autumn Budget the cynic in me thinks these meeting notes could be used by HMRC to influence Ministers to push the button on a private sector role out.

So, in summary, 6 months on from the changes the landscape looks like this:

    • Public sector bodies and recruiters seem to, in the main, have managed their risk of the new legislation impacting them.
    • HMRC will see an increase in PAYE as a result.
    • In many cases, the supply chain has taken the path of least risk leaving many genuinely self-employed contractors financially worse off.
    • Contractors have migrated out of the public sector and projects have been delayed / postponed or are now running over budget.
    • Non-compliant providers have sniffed an opportunity to exploit this confusion and will milk this until HMRC do something about it (at which point they will liquidate and disappear into the sunset).
    • HMRC will see a reduction in PAYE as a result.
    • The growth in these new non-compliant models bring new risk to the supply chain which has not yet been identified but could be far more severe than the IR35 risk.

Have the IR35 changes been a success? Let me know what you think….