As an IT recruitment consultant that specialises in resourcing and supporting IT contractors for leading UK organisations, I’m often asked for insights into the latest IR35 changes and for help with planning for IT personnel requirements under IR35.
In this article, I’ve tried to address the questions I’m most frequently asked about IR35 and I’ve provided some tips for preparing for its introduction into the private sector.
HMRC created IR35 regulations to reduce tax avoidance by workers that supply their services to an organisation via an intermediary company. Therefore, this affects many IT contractors that supply their services to clients via their own limited company, an umbrella company, or an IT recruitment agency.
As FT Adviser stated: “When sitting inside IR35, a contractor is deemed ‘employed for tax purposes’, which means they are required to pay income tax and national insurance contributions, just as an employee would.”
IR35 explained in HMRC’s terms read as follows: “A worker is involved in off-payroll working when they work for a client through their own intermediary, often a personal service company (PSC), but would be an employee if they were providing their services directly.
“As off-payroll workers are paid through their own intermediary, they pay Income Tax and National Insurance contributions (NICs) in a different way to an employee.
“The off-payroll working rules are in place to make sure that where an individual would’ve been an employee if they were providing their services directly, they pay broadly the same tax and NICs as an employee.”
HMRC advises that all IT contractors that provide services through an intermediary and all organisations that acquire services through intermediary companies should consider the IR35 regulations carefully.
Currently, Public authorities are responsible for deciding if the IR35 regulations apply to specific projects and services. The contractor, through their intermediary, is required to supply information to the public authority to help them make the decision. If the rules do apply, the public sector employer would be responsible for ensuring any taxes are paid, except if the contractor is supplied through an IT recruitment agency or umbrella company, who would then take-on that responsibility.
In April 2020, the IR35 changes mean that the responsibility for determining the IR35 status of contractors in the private sector will switch to the employer organisation and it is widely expected they will also have the liability for ensuring tax is paid (except when intermediaries like IT recruitment agencies or umbrella companies are involved).
In the public sector, it is currently the employer’s responsibility to convey the IR35 status of the project to the contractor at the start of the contract. The contractor has a right to ask for the reasons for that determination and in response, the employer must provide those reasons in writing within 31 days. Where the employer either does not provide the determination, or the reasons for it within these time scales, the liability for any income tax and NICs due transfers to the employer until they do so.
While the government believes that the existing IR35 rules have worked adequately in the public sector, it considers there are a small number of points that need further consideration before the rules are rolled out more widely. For example, there is currently no requirement for the off-payroll worker to be given a determination by an employer ‘directly’, nor is there any legislative right for the off-payroll worker, or fee-payer to seek the reasons for the determination.
HMRC's inforgraphic demonstrates the responsibility of conveying the IR35 status in the supply chain.
HMRC defines an intermediary as:
IR35 has existed in various guises since 2000, but the introduction of the ‘Off-payroll rules’ in April 2017 certainly created a reaction the IT contracting industry. At Crimson, we saw a larger influx of CVs from public sector IT contractors that wanted to switch into private sector roles. However, we believe that the IR35 reform did not affect the sector as much as had been predicted by some media outlets.
Organisations also reacted to the IR35 reform. Some stopped working with contractors for a period, some began to insist on the blanket operation of PAYE, and some began to use the HMRC IR35 assessment tool on an assignment-by-assignment basis to judge when to apply the regulations.
Come April 2020, we expect less of a reaction by contractors than there was in 2017. This is because there will be fewer alternative options because the laws are already active in the public sector. Nevertheless, we are advising our clients to prepare for the changes by working out what processes will work best for their organisation. We do expect that many IT contractors will look more favourably on opportunities where employers can demonstrate documented evidence that their projects sit outside of the IR35 regulations as well as factors such as detailed information about how the individual was engaged during the project (For example, did they use their own equipment, where they will be working from, how the work will be monitored). It is also a case of ensuring that the following is also covered time, productivity, outputs and obligations as well as the hiring organisation cannot be controlling or directive in anything other than what is in the contract.
Qdoscontractor.com reported: “That nearly 77% of 1400 UK contractors responding to a Qdos survey said they have zero or very little confidence that the private sector will be prepared for these changes will be concerning to the thousands of organisations that rely on these workers, for the skills and flexibility they provide.”
Therefore, Crimson is urging its clients to act now so they won’t be in an uncertain position in April 2020. Employers should assess their risk by considering the following questions:
Crimson recommend its clients should test on an assignment-by-assignment basis using the HMRC IR35 tool CEST, as this will allow employers to use IT contractors in a demonstrably self-employed way to deliver projects. It will also give organisations the freedom and ability to access the talent they need. However, employers should be mindful that some CEST assessments have been overturned in the courts. Therefore, organisations should ensure they have a good understanding of the IR35 regulations before using the tool. If you would like to find out if the rules apply to your latest project, click here to use the HMRC IR35 tool CEST.
In some circumstances, IT recruitment agencies like Crimson can offer supportive managed service programmes (MSPs) and statement of work (SOW) projects to shoulder the administrative burdens of IR35 for employers. Through these schemes we help employers to assess the incumbent workforce, access the skills they need, and put future processes in place to minimise the risks throughout the supply chain.
In addition, Recruitment & Employment Confederation (REC) has reported that the Government is proposing an exemption for employers that are small companies. It said: “They propose using a definition of small companies similar to the definition used in the Companies Act 2006 which is: a company which in a particular financial year meets two or more of the following conditions: (1) has a turnover of not more than £10.2 million, (2) a balance sheet total of not more than £5.1 million or (3) not more than 50 employees.” Therefore, employers and IT recruitment agencies alike must check whether the employer is a small company, and thus exempt from the IR35 changes.
As an IT contractor, you’ve got a hectic enough schedule and a range of pressures already. You could do without any legal or financial hassles from HMRC due to IR35 infringements. Therefore, we recommend you take the following steps:
We expect the draft legislation to be published in summer 2019, with a view to it being finalised in December 2019, which won’t give employers, contractors, or intermediaries much time to prepare. Therefore, it is wise for all parties to keep their ears to the ground and begin to plan the best they can for IR35 in the private sector.
Crimson is offering clients a Discovery Meeting to help you explore the risks and opportunities of the changing regulation. You can learn more and make contact here.
Crimson is an IT consultancy, an IT solutions provider, an IT recruitment agency, and a Microsoft Gold Partner operating across the UK.