The IR35 debate has been around for years now, 19 years in fact, despite all this time the legislation remains clunky at best with various court cases appearing to have interpreted the same piece of legislation in different ways. So what of the latest 2020 chapter of this story?
Well despite stories of mass cessation of contracts and various tales of doom coming from the marketplace, along with pitchforks and flaming torches marching towards the HMRC offices. The government appears to have pulled a partial if not cloaked U-Turn in the form of the small business exemption clause. Small businesses are excluded from IR35 reform for the private sector, but what constitutes small? The article below draws upon a particularly concise yet informative piece RSM shared.
The key announcement in last year’s Budget from an employment tax perspective was that the Government will extend the public sector off-payroll rules to large and medium-sized private sector businesses from 6 April 2020.
This will mean that businesses using the services of workers operating through intermediaries such as personal service companies (PSC) will be required to assess the arrangements. Where they conclude that the so-called IR35 rules apply, the organisation that pays the worker’s intermediary (which could be the business or a third party such as an agency) will be responsible for accounting for income tax and National Insurance Contributions (NICs) through PAYE, including the additional cost of employer’s NICs.
Exclusion for small businesses
Crucially, having listened to concerns raised during the consultation process, it has been decided that ‘small’ businesses will be excluded from these new rules. Where services are provided to small businesses by workers operating via intermediaries such as PSCs, the intermediary will continue to be required to ‘self-assess’ and account for tax and NICs where it is concluded that the rules do apply.
The Government has estimated that, as a result of the exception for small businesses, 95 per cent of end-users will not need to apply the reform, but what is ‘small’ for this purpose?
To qualify as a small company, a company that is not otherwise ineligible must meet at least two of these three qualifying conditions:
Turnover of £10.2m or less;
£5.1m or less on its balance sheet; or
50 employees or less.
There is an interaction between financial years of qualification as a small company and how those relate to tax years included.
Anti-avoidance rules apply for joint ventures, groups and connected persons. Similar rules apply for LLPs, unregistered companies and overseas companies and others save that the main determinant for inclusion in the small companies’ regime for these entities is the undertaking’s turnover (specifically defined for these purposes) in the financial year being no more than £10.1m.
Modifications for the private sector regime
It is also interesting to note that in the summary of responses, the Government stated that it intended to refine the design of the reform for the private sector to help the end-user business make the correct determination of whether or not the rules apply. This was in response to comments that many end-users in the public sector have made blanket decisions that all engagements are caught, to minimise their own risk and administrative burden. The Government has introduced legislation covering what happens to businesses that fail to take reasonable care in arriving at their decisions as to whether or not the rules apply.
What is clear is that large and medium-sized businesses in the private sector should use the time between now and 6 April 2020 wisely, and should not underestimate the amount of work required to prepare for this major change.
Dare I try and provide a slightly more positive slant on the changes, I fully expect to be shot down in flames here but…
I have spent 20 years in the contractor space including working with the large IT outsource providers early on in my career, I made a conscious choice to move away from the big players in the sector after seeing individuals reduced to the equivalent of a battery hen or the energy farm in the Matrix (for those of you who have seen the film). As a company, we work with a number of smaller consultancies (below 50 employees and below the turnover threshold for the small business criteria, (so outside of the IR35 reforms) who are providing quality environments for their permanent employees and contractors alike.
There is a very real prospect that larger companies may well now engage with these smaller consultancies to fill the newly created skills gap, either engaging with smaller consultancies to provide individuals on their site or for neatly defined projects outsourcing these requirements off-site; ultimately, producing a more diverse and contractor focused marketplace and breaking the hold the big consultancies have over the marketplace. Clearly, all of this will be subject to the original in/out premise of the IR35 legislation.
The above is speculation but what I am sure of is the demand for skilled technical talent far outstrips the number of individuals available in the UK, while this remains the case, supply and demand norms will rule the day and companies will simply look to new ways of working.