In April 2017, the public sector saw the implementation of the IR35 reform, which placed the responsibility to determine whether a contractor is inside or outside IR35 on the public sector and the clients engaging contractors. In April 2020, medium to large businesses in the private sector will also be expected to assess the status of the contractors they engage.
To gain a deeper understanding of the changes, who it will affect, and how best to prepare, we spoke to Samantha Hurley, Operations Director at APSCo - The Association of Professional Staffing Companies. Having worked in the UK professional recruitment sector for over 30 years and sitting on the HMRC IR35 forum since its inception, Samantha is now co-chair on behalf of the external members of the forum and is well placed to provide a unique insight into what these changes really mean.
“It is important to understand that determining the status of a contractor is not about the individual or the role – it’s the assignment,” Samantha explained. “This can be confusing sometimes. It’ll be up to the fee payer, which is the intermediary, the recruitment business, or whoever pays the contractors’ personal services company, to tax them at the source if they fall inside IR35.”
How will IR35 impact the private sector?
Originally an Inland Revenue rule, now managed by HMRC, IR35 was introduced in 2000 to crack down on bogus self-employment and personal service companies, and ensure that any professional operating as an employee was being taxed and paying national insurance (NI) as such.
That is now being changed slightly, but essentially extended into the private sector. From April 2020, when engaging a contractor working with a medium or large end client, it will be up to the end client to determine the status of that assignment.
The IR35 changes in the public sector, while challenging, were restricted to that small client base, which was reasonably easy for the Government to control. Looking at the changes in the private sector, Samantha highlighted that: “HMRC has been really clear that it will initially focus on the financial sector, banking, pharmaceutical, and construction – sectors where large numbers of contractors are used.”
For the biggest companies in these areas, “it is already being disruptive”. These companies cannot afford the reputational damage of being non-compliant when it comes to the new legislation.
However, one challenge that the public sector experienced, that the private sector will not, is the exodus of talent from one sector to the other. When IR35 regulations changed in the public sector, “many of those with transferable skills, moved to the private sector,” Samantha explained. “This meant that the supply chains into many public sector bodies were stressed, and they found it difficult to replace the skilled talent they lost.” But she reassured that this can’t happen this time.
The timing of the reform in the public sector was also very quick, which HMRC has acknowledged and has, as a result, given a longer lead time for businesses to prepare in the private sector.
Samantha also pointed out that while most large businesses are well advanced in their preparations, many end clients will get their information from their recruitment partners. And while this is fine if the recruitment business is a member of a trade association – a professional body like APSCo – the majority of recruitment businesses in the UK, are not. “HMRC is undertaking a communication programme with businesses, but I’m not sure that’s going to be enough,” Samantha commented.
Preparing for the April 2020 IR35 changes
For an end client, it is important to understand what the changes are, the impact of the changes, and the legal obligations they are going to have.
If you are an end client preparing for the IR35 changes, ask yourself: what does your current contractor base look like? Start looking at the roles or the assignments that are being completed by contractors. Then look at whether those are in or outside of IR35.
Samantha suggests that you will need to segment contractors “depending on whether a contractor is likely to run over into April next year. If the contract is going to finish before then, obviously that doesn't need to be their priority.”
She continued to highlight the key factors that end clients need to consider.
- How are you going to make the status determination?
- Do you have the internal expertise to do that? A lot of the time, the answer will be no.
- Are you going to develop that expertise yourself or use HMRC’s Check Employment Status for Tax tool (CEST)?
- Or, are you going to use an external third-party expert of some kind?
While the responsibility will now largely fall on end clients, contractors must understand what the changes are and what their status is likely to be. This should include their current assignment, any recent assignments they've done or the type of roles that they tend to do.
If you are a contractor, speak to whoever is engaging your services and ask questions about the status determination you will likely come under and what effect that’s going to have on your pay rates. From here, you will need to seek advice about the best route going forward.
Samantha expanded on this by saying: “If they're going to be outside, then clearly, that's not an issue, they can carry on working as they have. But if they're in that grey area - and I think a lot of contractors will be in that grey area in the professional sector - or if they’re going to be inside, then they need to be thinking about what solution is being offered to them by their engager, or a future engager, and how they will want to work in the future.”
Navigating the changes
“The key to this being successful is contractors, recruitment businesses, and end clients all working together,” Samantha said.
“Recruitment businesses [need to] work in partnership with their end clients to help them produce a robust process around the determination of their contractors’ status - because that's the most important piece. Hopefully, this will mean a lot less disputes over status later on down the line.”
If you would like to explore how we can best support you in hiring professionals to support your business, get in touch with your local Michael Page office today.
Commercial Director, Michael Page
This material is intended for general information purposes only and does not constitute legal advice. Specialist legal advice should be taken in relation to specific circumstances.