Is the private sector ready for IR35?

12 months from now, IR35 will be introduced into the private sector, two years after it was first implemented in the public sector.

The over-complicated legislation has not been completely ironed out for the public sector and, with the private sector proving to be arguably more complicated, it remains to be seen whether IR35 will prove to be at all beneficial.

Gordon Thrower, senior tax manager at MHA MacIntyre Hudson, said: “Businesses in the private sector [that] engage workers operating through limited companies should note that there is only a year to go before a major shake-up of the rules that apply to such engagements—the so-called IR35 rules.”

“From the private sector engager’s point of view, the administrative cost of making those decisions alone could be significant, as the rules require that each arrangement should be reviewed on its own merits.”

Recently, the consultation document was released, looking into the various benefits and problems that could arise from IR35 implementation next year.

“The consultation shines a spotlight on the additional complexities of rolling out the IR35 changes to the private sector,” said Nigel Morris, employment tax director at MHA MacIntyre Hudson.

Thrower added: “HMRC recently issued its consultation on the new proposals, which, from April 2020, will extend to the private sector the changes introduced to the public sector in April 2017.

“These changes transferred the responsibility for deciding whether PAYE should be operated on payments made from the worker’s company to the public sector payer. Where the new rules applied, the public sector payer was then left with the subsequent burden of operating PAYE on payments, as if the worker were an employee.”

“Given the experience encountered by public sector engagers two years ago, it would be prudent for their counterparts within the private sector to consider commencing reviews of engagements involving limited companies sooner rather than later.”

The issue of moving the responsibility to the employer has meant that IR35 has been met with some criticism.

“From the private sector engager’s point of view, the administrative cost of making those decisions alone could be significant, as the rules require that each arrangement should be reviewed on its own merits,” said Thrower.

“This will require a lot of time and effort on the part of businesses, whose staff may not necessarily have sufficient expertise to do such reviews justice—particularly if the business has numerous contracts in place.”

There is also the not so small matter of the increased costs of the Employers’ National Insurance for businesses in the private sector. These payments will be considering whether the Apprenticeship Levy applies to a private sector business; this will add further financial strain for employers “engaging workers through their own companies.”

“This is a questionable approach, given a company might qualify as small only if it defines members of its workforce as off-payroll, the whole crux of the issue IR35 is trying to address.”

Thrower has advised: “Given the experience encountered by public sector engagers two years ago, it would be prudent for their counterparts within the private sector to consider commencing reviews of engagements involving limited companies sooner rather than later. This will allow them to identify affected engagements and evaluate the potential impact, financially and practically. Changes can then be planned for contracts and pay dates to ensure compliance before 6 April 2020.”

Furthermore, it has been argued that the current IR35 rules that exist in the public sector cannot be applied so neatly in a sector where every business is different.

“The consultation proposes defining whether an unincorporated business is small by the number of its employees,” explained Morris. “This is a questionable approach, given a company might qualify as small only if it defines members of its workforce as off-payroll, the whole crux of the issue IR35 is trying to address.”

“A legal no-man’s land beckons for small private companies: do they need to implement IR35 rules or not?”

He added: “It has always been the intention to exclude small businesses from the rules, but there is still no watertight definition of what will constitute a small business.”

This is a further complication that was a non-issue for businesses in the public sector, due to the fact that “the rules apply to all.”

“However, in the private sector, the size of the business will be a crucial factor,” Morris said.

“A legal no-man’s land beckons for small private companies: do they need to implement IR35 rules or not?” he asked. “The current consultation suggests using the definition of small company from the Companies Act 2006, but this only applies to limited companies.”

He continued: “If you are a small unincorporated business – for example, a sole-trader or a partnership – you probably need to tread very carefully and take appropriate advice before concluding you are safe from IR35.”

“In trying to introduce complicated legal changes in a relatively short space of time, the government is likely to run up against its own self-imposed deadline, and a potential repeat of what happened when IR35 was introduced in the public sector, with only a matter of weeks of notice.”

A further problem that Morris has cited is that of the timing of this consultation. As it is leaving a very small window for those concerned to submit their feedback before the draft Summer Finance Bill, it is very unlikely that any suggested changes will be included. It has been announced that the consultation will be running until the 28 May 2019.

He said: “This leaves a very short window for it to be incorporated into any draft Summer Finance Bill, which would have to be published soon after the deadline, to allow time to pass through parliament.”

“Introducing the relevant IR35 legislation after the Autumn Budget may be too late to meet the target implementation data of April 2020,” Morris concluded. “In trying to introduce complicated legal changes in a relatively short space of time, the government is likely to run up against its own self-imposed deadline, and a potential repeat of what happened when IR35 was introduced in the public sector, with only a matter of weeks of notice.”

When asking our readers on Twitter directly, 63% revealed that they did not believe IR35 changes should be applied to the private sector. 18% said the changes should be introduced next year, and the remaining 21% stated that these changes did not apply to them.

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