The changing face of contracting: IR35 in the private sector
THE CHANGING FACE
IR35 IN THE
By Victoria Walmsley
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
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
WILL INTRODUCING IR35
TO THE PRIVATE SECTOR
AS WE KNOW IT?
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
Unaware of changes
Are you aware of the proposed changes to the intermediaries
legislation, otherwise known as IR35 or ‘off-payroll’ working,
in the private sector?
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
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.
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.
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.
Inside IR35 Outside IR35 Unsure
What do you believe the status of your current role is?
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
THE CHANGING FACE OF CONTRACTING - IR35 IN THE PRIVATE SECTOR
T: +44 20 7092 0151
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
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
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:
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.
THE CHANGING FACE OF CONTRACTING - IR35 IN THE PRIVATE SECTOR
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+44 (0)20 7092 0000 firstname.lastname@example.org
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