HMRC has begun the formal consultation into the long-awaited IR35/off-payroll reforms in the private sector.  The consultation deadline is Tuesday, 28^th May but changes are due to come into force in April 2020, so it’s important to know what’s proposed and how you may be affected.

The proposals in summary

The main change which is planned is that end hirers will become responsible for determining whether a contractor is inside or outside IR35.  At the moment, that responsibility rests with you as the contractor (or your intermediary such as Crest Plus or your recruitment agency).

“…clients will be required to make a determination of a worker’s employment status and communicate that determination. In addition, the feepayer (usually the organisation paying the worker’s PSC) will need to make deductions for income tax and NICs and pay any employer NICs.”
HMRC consultation document

While these plans exclude small businesses (annual turnover under £10.2m; balance sheet not more than £5.1m; no more than 50 employees), they are certainly controversial, with many industry commentators predicting difficulties ahead for affected contractors.

The fear is that end hirers will decide that it is simply too difficult to assess all contractors accurately, or too risky if they get it wrong, and decide to create a blanket rule whereby all contractors are treated as if they fall inside IR35.  The end hirer would then be required to deduct income tax, National Insurance and employer NICs, affecting the take-home pay of the contractor.  (This was certainly the situation many found themselves in when the rules were introduced in the public sector in 2017.)

If this happens, then contractors who operate through their own limited companies or personal service companies would be treated as if they are employees, with deductions for income tax and National Insurance made at source (PAYE).  Contractors who are treated as such would find they pay more tax – in effect, paying tax twice, once via PAYE and again via their own limited company, and therefore their take-home pay is reduced.

This is frustrating to say the least, as the criteria for IR35 assessment is not changing, so anyone who is not subject to IR35 now should not be classified as within IR35 when the new rules come into force.

What you can do now

The silver lining for contractors who work in the private sector is that at least time is on your side.  The formal consultation process deadline is Tuesday, 28^th May and we will be contributing our views via our industry body, the FCSA.  The changes are expected to be announced in the draft Finance Bill this summer which means you still have several months before April 2020 to decide what action to take.

The most important steps you can take right now are to stay abreast of the changes – we will keep you informed via this newsletter and our company LinkedIn page.  The other step you can take is to begin talking to your end hirer (the one you carry out work for) to understand how they are responding to the proposed changes.  This will enable you to consider what options are likely to be available to you, and which would suit you best.

If the end hirer is going to add you to their payroll and deduct PAYE, you will need to determine whether they will continue to work with you if you operate via your PSC.  If so, you will find that you have to pay tax via PAYE and via your PSC.  Do you accept the resulting lower take-home pay or could you re-negotiate your contract and ask for a higher rate of pay to protect your income level?

Another option is to consider switching to our Umbrella company which means you continue to fulfil your contracts as a flexible worker, but that we operate as your end hirer.  This removes the ‘risk’ from the organisation(s) you work for of concerns about making a wrong assessment.

While this way of working involves becoming an employee of Crest Plus and paying tax and National Insurance via PAYE, it does enable you to retain the flexibility of working as a contractor while receiving regular employee benefits including sick pay, holiday pay, access to a company pension scheme and a record of continuous employment.  You can find out more about our Umbrella service and how it works.

Further reading

We will keep you informed of key developments as the consultation process progresses.  You can read the off-payroll working rules from April 2020 policy paper and consultation document here.