A brief history of the Intermediary Legislation
In 1999 as part of Gordon Brown’s fiscal budget during his tenure as the Chancellor of the Exchequer, the government announced and introduced measures to counter tax avoidance through the use of “Personal Services Companies” or PSCs by individual contractors when providing their services to businesses.
Properly known as the Intermediaries Legislation, it is more commonly known as the IR35 legislation or regime. The name IR35 comes from the numbered Inland Revenue (now known as HMRC) budget release number 35 in which it was released.
Historically, the use of intermediary companies to perform services was advantageous for contractors by limiting their tax liabilities. For example, individuals working through their PSCs could take all of their wages in one month, thereby only incurring National Insurance contributions (up to the monthly ceiling) instead of paying a regular contribution every month like most employees.
HMRC introduced a concept of “disguised employees” for individual contractors who work in a similar way to a normal employee of a company but are paid through a separate intermediary company (or PSC).
IR35 changed the industry by introducing rules which required disguised employees to pay an equal or similar amount of tax and National Insurance contributions as a regular employee. This means that if you are caught out by the IR35 regime and are a disguised employee, you could face an increase in your tax bill.
What is the government changing?
Previously it was the PSC or the self-employed contractor who would be responsible for assessing whether the intermediary worker (ie themselves) was within the IR35 regime or outside it. Realistically, this meant that most contractors would identify as self-employed and outside IR35.
In 2017, the IR35 regime was reformed to shift the burden from the PSC or self-employed contractor in the public sector. Under the new regime, public bodies such as local councils, the NHS or other government departments (eg the Home Office) would be responsible for checking whether their contractors were genuinely self-employed.
Coming in 2020, this regime is going to expand to the private sector.
2020 and beyond
From the 6th April 2020, private companies will now bear the responsibility for evaluating and determining whether a contractor was genuinely self-employed or a ‘disguised employee’. The liability will also shift to private companies.
One relief for the private sector is that small businesses are going to be excluded from these changes. This new regime for the private sector will mainly affect medium or large businesses.
For the purpose of IR35, a small business is defined as having at least two of the following:
- it has an annual turnover of more than £10.2 million
- it has a balance sheet total of more than £5.1 million
- it has more than 50 employees
The private sector includes third sector organisations, such as some charities.
If a company is exempt the determination will remain the responsibility of the worker’s intermediary.
Employment Status Determination
The new IR35 regime also introduces the concept of an Employment Status Determination Statement (ESDS). This is a statement which is to be made by the end-user client following an IR35 assessment and declares the alleged employment status of the contractor with the reasons behind the decision.
Any other intermediaries will be obliged to pass this employment status determination statement down the contractual chain until it finally ends up with the PSC, and in addition it will need to be passed to the individual consultant.
So what should businesses be doing to prepare?
Well, if you’re a small business (as defined by the legislation), then you won’t be affected by these changes.
However if you’re a large or medium business then you may need to take steps to evaluate your current working practices.
You might want to ensure that the arrangements you have with your contractors are outside of the IR35 regime.
For example, allowing the contractor to work for multiple clients at the same time could infer a self-employed status. Allowing the contractor to a right of substitution so that the contractor is not obliged to provide a personal service is another example. Minimising control over the contractor could also help the argument that they are outside IR35. Where possible the contract should be project-focused in terms of duration and method of payment.
It’s important to ensure that the working practices accurately reflect the intended status of the contractor.
Many businesses and contractors are sceptical about the new changes and some even assert that it will shake-up the contracting industry significantly. It’s been reported by Contractor Calculator, that a quarter of NHS locums who responded to their survey stated that they had decided to leave the NHS altogether as a result of IR35 reform. 60% of the sample locum group also reported that they had been unfairly assessed as being within the IR35 regime after the NHS resorted to using illegal blanket assessments to limit the increase in administrative costs.
The private sector has already seen some ‘knee-jerk’ reactions to these changes with major banks such as Barclays, Lloyds, RBS and others to stop hiring limited company contractors. Barclays has told its contract workforce that it will no longer engage contractors who operate via limited companies, as a consequence of the forthcoming private sector IR35 off-payroll changes next April.