The changes to IR35 next year are going to send shockwaves through the contractor market.
There are concerns about who will be responsible for deducting tax and NI, and fears that some companies may try to stop using contractors altogether.
But the devil is in the detail. What exactly do accountants need to know about the IR35 changes, how should they advise their clients and what will the impacts be on the gig economy?
The key things to bear in mind:
- the changes only apply to those contractors working through personal services companies. This removes a huge number of gig economy workers from the problem – as we will see.
- there are exemptions for smaller companies – we are only really talking about mid- to large size companies, and the definition of ‘small’ company is generous.
- not all contractors will be inside IR35 as a result of these changes anyway – as before, there are many examples in which contractors, even if they have personal services companies, can still be working outside IR35.
What are the changes?
“Currently, the obligation to decide whether someone is inside or outside IR35 rests on the contractor,” says Chris James, Head of Accounting Operations at JSA Group and Chairman, FCSA. “It’s the contractor’s responsibility if they do it wrong or ignore the rules, don’t self-assess properly and don’t pay the correct tax.”
Currently, “end-users, clients and agencies don’t have a risk unless they wholesale push people into working like that.”
This gives the rationale for HMRC wanting to make changes – individuals “might take a risk or be unclear about their status in order to avoid tax,” says James, “and potentially the only party who loses is HMRC.”
How does this affect liability?
The change is that from April 2020, the engager becomes liable not the contractor. “It doesn’t mean they have to pay it,” says James. “But it does create liability issues.
If the tax hasn’t been deducted at source and HMRC later concludes that it should have been, you have a supply chain situation where the end-user has transmitted liability down the chain. If lower down that chain, someone hasn’t deducted it, and HMRC can’t collect there, the liability can bounce back up again.”
So, the end-user could end up liable even if they correctly assessed the person as inside IR35 and transmitted this fact. “This will make end-users worried – they won’t be able to guarantee, by following proper procedure, that they won’t end up with liability and that’s a big unintended consequence of these changes.”
The result of any HMRC investigation deciding that the contractor is a “disguised employee” could now be a bill for tax unpaid to the end client or agency or other party paying the contractor’s company – no longer the contractor.
How might these changes affect the gig economy?
“The issue here is to establish what you’re talking about when you think of the gig economy,” says Rebecca Seeley Harris, a specialist legal consultant in employment and tax status.
“It means different things to different people. For me, its roles are at the lower end of the pay arena where people have a lot of uncertainty, are not well paid, and have no rights.” For Seeley Harris, “with the gig economy, therefore, it’s unlikely they would have a personal services company, and unlikely they would be affected by these changes.”
That “unlikely” needs a caveat. “The Treasury has seen evidence that some companies have persuaded people to work through personal services companies who were on a low wage and not necessarily in full understanding of the position.” This is the “push” that Chris James talked about above.
Attention to detail is required
So, amongst much of the current commentary about IR35 changes, details such as this sometimes get lost. “You have to be really technically correct about the terminology,” Seeley Harris says, “because it makes a difference to the outcome.”
A self-employed person working directly for a company is different, from a tax point of view to a self-employed person working through an agency; and is different again from someone describing themselves as self-employed, but working via a personal services company.
The nature of work needs to be considered
Then there are further differences about the nature of the work and the relationship with the engager – if the engager sets your hours, for example, or decides exactly how they want the work delivered, you might from HMRC’s point of view be considered a disguised employee.
For Seeley Harris, “the issue for the gig economy is that you have Uber drivers and Deliveroo drivers and so on who aren’t very well paid. The business model from the point of view of the company is that they are not paying VAT because they are not employing the drivers. As those drivers are likely to be below the VAT threshold, the individuals won’t be paying VAT. So there’s a hole in the model – it’s a real mismatch.”
There are two issues here, Seeley Harris says.
- “At present, the worker in the gig economy is self-employed both for tax and employment rights. Various individuals have taken legal action to claim ‘worker’s rights’ for employment purposes.” They have won their cases, she says, “and subsequently are now ‘workers’ with basic employment rights.” But – they still pay tax as self-employed. “These people are not affected by IR35.”
- The second issue is on IR35 itself. “From April 2020, the engager will make the assessment and the person who pays the PSC will bear the tax burden. So, these people will pay tax as a ‘deemed employee’ but have no rights.”
Promoting risk-averse behaviour
Chris James thinks that the changes would not necessarily in themselves damage the gig economy, but the extra burden of checking, plus misunderstanding of the changes, might have that effect. “It does make it harder for end-users and agencies to engage with gig workers than before,” he says.
“It won’t kill the gig economy, but it will promote risk-averse behaviour. There might be a rush of people saying, perhaps we won’t use contractors at all,” he argues. “In reality, in many, if not all cases you will still be able to use contractors as before.”
But he suspects the lack of clarity around the issue may prevent this understanding. Further down the line, “they will realise they can use gig economy workers in the same way as before after all and go back to them.”
The disruption in the meantime as the market settles into the new normal, after April 2020, “will be painful”, says James. “Businesses are facing quite enough in the way of uncertainty at the moment”, he continues, “and I’m not the only one querying the timing of these new rules, in the circumstances.”
How accountants should advise their clients
• Know the employment status of your client. If they are operating through a personal services company, they may be liable for IR35. If the client is an engager, ensure they know the employment status of those they are using as contractors. “It has got to be through a personal services company,” says Seeley Harris, “or you don’t have an IR35 problem.” Even then, it will only apply in certain circumstances:
• Assess whether the worker is inside or outside IR35. If you have autonomy and are not obliged to work for the engager; if you set your own hours; if the client is not obliged to keep offering you contracts and you are not obliged to take them; if other contractors can complete your work; and if the engager does not have heavy influence over the manner in which work is done; then you are likely to be outside IR35. “Accountants may not know the IR35 status of their client,” says Chris James, “and haven’t needed to know how to do a proper IR35 assessment before. They do now.”
• Ensure you understand the changes to IR35. The engager, not the contractor, now needs to ensure that somewhere along the chain, liability for IR35 is met, if such a liability exists.
• Understand exemptions for small companies. Inside any 12-month period, you are regarded as a “small” company if you meet two out of these three criteria: your turnover is below £10.2 million; your balance sheet (gross assets) is below £5.1 million; you employ fewer than 50 people. This removes a further huge band of engagers from IR35 liability. Critically, it is the size of the end engager, not the agency or contractor’s own company, that is being considered here.
Further reading on tax:
- From railways to hospitals, how IR35 sent employers off the rails
- Power up your tax knowledge with AAT
- Opinion: What are the prospects for more devolved taxes
Mark Blayney Stuart is Business Journalist of the Year, Wales Media Awards 2017 and Former Head of Research at the Chartered Institute of Marketing.