Changes to the IR35 regulations as of 6th April 2017 now mean that for all public sector organisations, it is the client that is now responsible for determining an employee’s IR35 status. For IR35 to apply, HMRC has to determine whether the relationship between a freelancer and their client is in fact an employer-employee relationship, by referring to a number of complex and subjective tests established in case law. If you are deemed to come under IR35 then you will be taxed at source like an employee. However, your tax status won’t change, meaning you will not benefit from pension contributions, holiday & sick pay, as well as unfair dismissal rights.
What are the effects?
- Where public sector organisations have large numbers of contractors, this could mean that they may simply resort to declaring that all contractors come within IR35, even if employed through a limited company.
- Freelancers working through limited companies are often engaged by businesses because of the flexibility and skills they provide. The legislation creates risk and uncertainty for such individuals and it ignores the fact they are genuine businesses, not disguised employees.
- The criteria is unclear, making it impossible to determine with any certainty someone’s IR35 status.
How will this affect contracts that are already in place (April 2017)?
Existing contracts may be particularly difficult. There will be cases where the engagement has been ongoing for a few months and the contractor has been satisfied IR35 doesn’t apply. The danger is now that the client may now simply declare it does apply. A recent IPSE (Association of Independent Professionals & Self Employed) survey suggested many contractors will not accept this and walk out, causes problems for public bodies that employ numerous contractors.
Why is this happening?
It appears that the Government’s intention is to force public sector bodies to make an IR35 decision before the role is filled. Going forward, posts may be advertised as being either “inside” or “outside” IR35. There are advantages to this, particularly if contractors are offered an “outside” role. Effectively this would be a guarantee they do not need to consider IR35. However, it’s easy to imagine that the roles pre-determined to be outside IR35 will have many more applicants than the ones which are advertised as inside. In addition, there is an ethical question about whether it is right for a public sector body to advertise a role that they have pre-determined to be the same as employment, but not to offer a permanent position. This cuts to one of the inherent contradictions of this measure. IPSE believes that if the Government wants to tax the people that work for it like employees, it should employ them. Only time will tell as to how this will turn out – the government has created a new online tool (ESS) to allow people to determine whether they are inside or outside of IR35. They are reserving the right to backdate taxes should a contractor be retrospectively ruled to be inside IR35, so there are potential headaches & test cases to come before we have a clear understanding of how this legislation will affect the market. As Interim & Contract specialists, we are keeping a close eye on the situation as it develops to ensure we are as up-to-date as possible with the latest interpretation of the regulations. If you are looking for an interim position within Business Change & Transformation or you’d like to chat about this topic please feel free to call me on 0161 413 6912.
