What do the Budget changes mean for contractors (and their end-user clients?)
The Chancellor, Philip Hammond, confirmed that he will extend the IR35 off-payroll rules to the private sector from April 2020. In doing so, he delayed, by a year, the proposed change.
The three big questions for the recruitment and technology industries
- What does this mean for these industries, given the prevalence of contractors working in them (often supplying their services through personal service companies, “PSCs”)?
- What steps can contractors take to mitigate the worst outcomes from this policy change?
- What steps can end-user clients take to respond?
What has and hasn’t changed
Note: the law hasn’t changed, but the application of the law, has. IR35 applies if, taking the PSC out of the equation, an employment relationship exists between client and contractor. If this happens, then under the new rules the client (not the PSC) will be responsible for unpaid NICs, tax and penalties. Thus, HMRC will transfer the IR35-risk from the PSC to the end-user client. This is a big change of policy. The stated aim of the reforms is to clamp down on “bogus self-employment:” in essence this is an “employment status” test.
What has changed is the operation of the policy and there are legitimate concerns about how the policy is being managed by HMRC.
With effect from April 2020, the end-user of the contractor’s services will be deemed to be the employer if IR35 applies: in the past it was deemed to be the PSC. This will then become an issue for all large and medium sized recruitment and technology businesses if they are engaging the services of contractors – from April 2020, it will be the end-user’s responsibility to get the “employment status” tests correct. There are legitimate concerns that the online tests for determining employment status on the gov.uk website is not accurate and not fit for purpose.
There is an issue of “scope” with the changes in the exclusion of small businesses: only large and medium sized employers are in scope. It may be that employers with less than 50 employees are exempted. Don’t be surprised to see contractors being asked to re-contract with smaller limited companies.
How to deal with the changes
Back to our three questions, above, the answers are as follows:
- This depends on the size of the business and the prevalence of the use of contractors. Recruiters, for instance, should be alive to their clients (who may be the ultimate end user) passing on the risk to them.
- The one-word answer to the question above: “diversify.” There may be a move to ask some contractors to become PAYE employees. Ultimately, if a contractor can demonstrate that they have multiple sources of income (many clients) then there should be no problem. However, if the contractor has one client; and works 50-60 hours a week for that client; and is under their supervision, direction and control, then there will be an issue. Contractors should be alive to requests for indemnity and warranty wording in commercial contracts.
- End-user clients should negotiate indemnities and warranties with the PSC: making the PSC liable for any IR35 costs and penalties. They may also want tri-partite agreements where the individual is also a party to the commercial agreement: in case the PSC is wound-up.
Businesses operating in these industries are advised to “watch this space” for further developments. The chancellor made one big announcement but the devil really will be in the detail, during 2019.