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31 August 2018

HMRC publishes its consultation on the future of IR35

Following last year’s changes to shift the responsibility on to public bodies for deciding if freelance workers are caught by IR35, the private sector has been waiting nervously to hear its fate.

HMRC has now published its consultation on the future of IR35 which makes it clear that the changes already introduced in the public sector will also be made in the private sector to ensure a level playing field. However, some changes are planned to how this will operate in practice, to address accepted shortcomings in the public sector model. The main focus of the consultation is therefore asking for feedback and suggestions to ensure it will operate effectively.

No implementation dates have yet been announced but it is clear that the changes are coming, and many believe the new measures will be rolled out to the private sector from April 2020.

HMRC have also made it clear that the rules for determining if IR35 applies will not be changed, so the changes will be to who takes responsibility for deciding if the rules are invoked for each contractor they engage, and not to the rules themselves.

So, what does this mean for contractors? Under current rules it is down to the individual contractors to decide whether the work performed through their personal service companies comes under IR35, and therefore whether that work is akin to employment by the end user. If it is, then the company must pay the individual carrying out the work a salary equal to 95% of the contract income. This therefore wipes out the tax/NI benefits of taking a low salary plus dividends, and leads to much higher tax liabilities.

Making this decision requires consideration of a number of factors, for example: who controls the worker’s day to day work; whether they work fixed hours; where they carry out the work; whether they provide their own equipment, whether the contract allows them to provide a substitute worker; whether they take any risk associated with running a business; how they are paid etc.

For a number of reasons, not least the well-publicised lack of HMRC resources in this area, many contractors have adopted the view that they are outside IR35.

However, with the shift in onus to the end user in making this decision, and with the engaging company facing big fines if they do not apply the tests correctly, naturally these tests will soon come into sharp focus.

We would advise anyone who is likely to be affected by these changes to review their current contracts and to be very mindful of the IR35 tests for any new engagements.

For further advice on this matter please contact me.


Key Facts:

  1. HMRC has published its consultation on the future of IR35
  2. Changes already rolled out in the public sector will soon be applied in the private sector
  3. This will shift responsibility for determining if IR35 applies to the end user
  4. End users will face big fines if they don’t apply the rules correctly so are likely to be cautious
  5. We advise reviewing current contracts and being mindful of the IR35 tests for new contracts

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