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The changing face of contracting: IR35 in the private sector


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Will introducing IR35 to the private sector change contracting as we know it? This presentation explores the perceptions of active contractors who work in the UK.

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The changing face of contracting: IR35 in the private sector

  1. 1. THE CHANGING FACE OF CONTRACTING: IR35 IN THE PRIVATE SECTOR By Victoria Walmsley Managing Director
  2. 2. CONTENTS TABLE OF 01 02 04 05 06 07 Will introducing IR35 to the private sector change contracting as we know it? A lack of transparency surrounding the changes Penalising contractors by decreasing their take-home pay Most contractors believe their role is outside IR35 Range of feelings to the future of life as a contractor Contractors’ feelings to IR35: A summary
  3. 3. THE CHANGING FACE OF CONTRACTING - IR35 IN THE PRIVATE SECTOR 01 IR35, otherwise known as ‘off-payroll’ working, was first implemented in 2000 but there are due to be further changes for PSCs contracting in the private sector from April 2020, as announced in the 2018 Autumn Budget. As we saw when the changes were introduced to the public sector in 2017, there will be an impact for any contractors whose role is found to be ‘inside’ IR35. To understand the sentiment of those directly affected, Morgan McKinley surveyed a proportion of our active limited company contractors to gauge how they feel about the introduction of the controversial tax legislation. To summarise the key changes, the responsibility of determining the status of each role will now change from the Personal Services Company (PSC) to the end hirer; the latter must ensure that they have taken ‘reasonable care’ in the assessment of each role, and that the fee payer, rather than the PSC, will be responsible for deducting any taxes due. WILL INTRODUCING IR35 TO THE PRIVATE SECTOR CHANGE CONTRACTING AS WE KNOW IT?
  4. 4. THE CHANGING FACE OF CONTRACTING - IR35 IN THE PRIVATE SECTOR 02 A LACK OF TRANSPARENCY SURROUNDING THE CHANGES When asked whether they were ‘aware of the proposed changes to the intermediaries legislation in the private sector’, 73% replied yes, but that left a surprising 27% who had no knowledge of the impending changes. It has been hot topic for the majority of contractors, agencies and clients over the last two years but it is clear that it isn’t the case for all. For those who aren’t aware of the changes, it is clear that the end clients are not in a position as yet to outline their solutions and were most likely waiting to see what the outcome of the budget was. It is likely there will be further delays on communication until further consultation with the private sector, most likely in Q1 2019. Just under half of respondents (48%) then went on to say they believed IR35 will be introduced to the private sector in April 2019 - primarily because the government needs extra revenue sooner rather than later, but also because the same legislation was introduced to the public sector in April 2017, six months after the budget and only weeks after the final guidelines were agreed. Aware of changes 27% Unaware of changes 73% Are you aware of the proposed changes to the intermediaries legislation, otherwise known as IR35 or ‘off-payroll’ working, in the private sector?
  5. 5. THE CHANGING FACE OF CONTRACTING - IR35 IN THE PRIVATE SECTOR 03 A slightly smaller percentage (33%) believed April 2020 would be the date, stating that Brexit holds priority in 2019. Further to the exit from the European Union, many think that lessons should have been learnt from the public sector claiming the government should recognise the fact businesses will need longer to implement changes. The remaining respondents were either unsure or, somewhat hopefully, don’t believe the changes will ever be introduced on the basis the HMRC have lost so many cases and there are more pressing matters where the government should focus their attention. There is much relief across the sector with the news that it has been delayed to April 2020 which gives the private sector time to understand how they will manage this project of change. A LACK OF TRANSPARENCY SURROUNDING THE CHANGES They need money now and perceive this to be lesser of many other tax raising evils. “ “
  6. 6. THE CHANGING FACE OF CONTRACTING - IR35 IN THE PRIVATE SECTOR 04 PENALISING CONTRACTORS BY DECREASING THEIR TAKE-HOME PAY The overall sentiment is a feeling of concern over how these changes will impact PSC contractors - this is not surprising considering it could significantly impact their financial situation. The respondents who seemed to be well informed on the topic predicted the result will be a watered down version of the legislation implemented to the public sector. Still, many see these changes as unfair, penalising contractors who take all the risk without the reward of being a permanent employee. With reduced take-home pay, more tax to pay and increased amounts of admin to undertake, there is concern for some that the benefits of contracting will seriously dwindle with the introduction of the legislation, leading to talent leaving the contract market. In turn, this would lead to a restricted talent pool and a drastic skills shortage, pushing up rates of those who do stay contracting and ultimately increasing costs for the end hirer. Only one respondent put a positive spin on the situation, conveying that: “Contractors are highly skilled, confident and entrepreneurial people, and whatever the legislation changes would be, they will not just passively accept the rules the government will impose. Most will either move to different contracts to be unquestionably outside of IR35, increase their rates so that the economic burden was carried by the client, or move to other global cities with more sensible tax regimes.” Everyone has to pay their fair share of tax but as contractor you don’t get the other benefits such as pension and sick pay. To move to PAYE is wrong. “ “
  7. 7. THE CHANGING FACE OF CONTRACTING - IR35 IN THE PRIVATE SECTOR 05 MOST CONTRACTORS BELIEVE THEIR ROLE IS OUTSIDE IR35 To gain a better understanding of how many would be affected, we asked our contractors whether they believed their current role fell inside or outside IR35. Two thirds responded ‘outside IR35’, with some reasoning this with the fact there is no Mutuality of Obligation (MOO), they do not feel they are under the direction of the end hirer or they work from home and use their own tools. Others are relying on their contract or what their accountant has said to them, but there was also a small percentage who admitted they need more guidance. For example, a couple cited if they have worked at the end client for under two years and believe they fall outside IR35, they are confusing permanent employment rights with the employment tests of IR35. 0% 20% 40% 60% 80% Inside IR35 Outside IR35 Unsure What do you believe the status of your current role is?
  8. 8. THE CHANGING FACE OF CONTRACTING - IR35 IN THE PRIVATE SECTOR 06 RANGE OF FEELINGS TO THE FUTURE OF LIFE AS A CONTRACTOR From our sample group of contractors, if they were to find their role sits inside IR35, 45% stated they would not make any decisions and simply wait to see what happens - with many admitting they would look to increase their rates and insist on certain contract terms to account for the higher levels of tax deduction. There was an equal split between contractors who would want to leave contracting altogether and become permanent employees, and those who would remain as a Ltd company and accept the tax deductions. A small minority (8%) stated they would accept PAYE and even less (6%) would look to work for a consultancy or work under a SOW. What is clear is that there will still be a range of options for contractors, it will be a case of finding the right one. It is more important than ever that contractors ensure they are compliant and beyond reproach with their payroll solution and Morgan McKinley will continue to work with a preferred supplier list of vetted umbrella providers to ensure full compliance. ORGANISATIONS ARE NOT ASSESSING THEIR CONTRACTORS Quite glaringly, every single respondent said their current end client has made no indication that there would be assessments for Ltd company contractors in the organisation, with merely one stating the organisation was aware of IR35 changes but waiting for more formal announcements. Further to this, 75% of respondents have not had their status assessed since starting contracting which is not surprising given one of the key challenges surrounding the implementation of IR35 are the tools available to make the assessment. HMRC advises contractors and end hirers to use the Contractor Employment Status Tool (CEST) to assess the status, however, this tool has shown to be flawed and there is little confidence in it. Whilst it works for those roles which are clearly ‘inside’ or ‘outside’ there is approximately 20% falling in the ‘don’t know’ category and where do they go for answers, HMRC? And there have also been a number of cases in the headlines recently, clearly a result of unintended consequences of these changes, where PSCs were found to be inside IR35 and were forced to be PAYE, have gone to employment tribunals claiming their rights under the Working Time Directive. If end hirers, suppliers and PSCs are not able to rely on the HMRC tool to ensure they take reasonable care surely the entire introduction of this change to IR35 legislation is flawed?
  9. 9. THE CHANGING FACE OF CONTRACTING - IR35 IN THE PRIVATE SECTOR VICTORIA WALMSLEY MANAGING DIRECTOR T: +44 20 7092 0151 E: Since we conducted the survey in the weeks leading up to the Autumn Budget, there is now clarity that the intention is to introduce the changes to IR35 in the private sector, which of course will disappoint the handful who were hopeful that the controversial legislation would never come into effect Due to the legislation negatively impacting contractors’ take home pay, it is no wonder that our respondents conveyed a strong feeling of resentment towards its introduction to the private sector. Back in 2017 when the changes were introduced to public sector contractors, a lot of issues and pitfalls were encountered, namely because of the short lead in time and lack of guidance. However, we can learn lessons from this and implore the government to listen carefully to the feedback from business in the further consultation. We know that all medium and large companies will need to take responsibility for taking reasonable care in making individual assessments, potentially employing additional resources or redirecting resources where necessary, in order to assess whether their contractors fall inside or outside IR35; it shouldn’t just be a blanket decision. CONTRACTORS’ FEELINGS TO IR35: A SUMMARY 07 If you would like to know more, please do get in in touch. I am happy to discuss all the potential options with both contractors and clients, especially given the number of unknowns and lack of clarity on what the changes will mean for their situations. Being prepared well in advance of the tax legislation changes due in April 2020 will ensure as little disruption as possible when they are eventually implemented.
  10. 10. THE CHANGING FACE OF CONTRACTING - IR35 IN THE PRIVATE SECTOR CONTACT US Morgan McKinley | 61 Aldwych | London | WC2B 4AE +44 (0)20 7092 0000 Follow us on LinkedIn