So, at last we have some clarity on the introduction of the off-payroll working rules – otherwise known as IR35 - into the private sector. Or do we?  The Chancellor announced in the Budget that, to bring the private sector in line with the public sector, businesses will become responsible for assessing an individual’s employment status. However, he also announced that the reform would not apply to the 1.5 million smaller businesses in the UK and that medium and large businesses would have time to adjust as the changes will not be introduced in April 2020.

What isn’t clear however is what the definition of those smaller businesses is. Does that mean the engagers, or the end client?  It is also not entirely clear where the liability in the supply chain sits.

HM Treasury in its Budget Brief has said that it will publish a further consultation on the detailed operation of the reform in the coming months which will inform the draft Finance Bill legislation expected to be published next summer - only months before implementation.

What we do know?

The off-payroll legislation for intermediaries, designed to determine whether individuals sit inside or outside an IR35 determination, was introduced into the public sector in April 2017 with the final legislation being published only ten days before implementation. Research from APSCo, a recruitment trade body, suggests that many public sector organisations still have little or no understanding of their obligations – and even less ability to make an informed decision.  If public sector hiring managers are finding this difficult – imagine the scale of confusion in the private sector where status decisions may have to be made by individual hiring managers.  There has also been widespread criticism of the ‘Check Employment Status for Tax’ (CEST) tool. This has been found to be flawed and inaccurate  – and in fact a Judge recently ruled against a CEST determination allowing a contractor  to claim back thousands in overpaid tax.  This does not bode well for a smooth roll out in the private sector.

What will the likely impact be?

HR and procurement teams will need to start mapping their entire organisation on an ongoing basis to understand where their contingent workforce sits and also review contracts and agreements throughout the supply chain. They will also need to ensure that they have the necessary skills and expertise to make accurate IR35 assessments on a case-by-case basis.

When the legislation was rolled out in the pubic sector there were some knee jerk reactions such as a ban on employing contractors working through a PSC (Personal Service Company) and an insistence on contractors working through an umbrella company. However, if this option was to be employed by organisations in the private sector, it would severely impact their ability to attract and hire contingent talent. The exodus of contractor talent from the public sector has demonstrated the effect it as had. 

There is no doubt that a flexible workforce is a vital part of the economy and contractors may well look to increase their rates – or simply shun particular organisations if there is a broad-brush approach to tax determination.  In fact, a recent survey of over 2000 contractors by Contractor Calculator found that 98% would actively turn down work which could lead to them being paid through PAYE. The likely result of this would be that the private sector would face rising costs, shrinking talent pools, reduced flexibility – and given the unreliability of the CEST tool – legal challenges to tax determinations.

According to the Freelancer and Contractor Services Association (FCSA), another impact is likely to be an explosion in tax avoidance schemes. This has already happened in the public sector where contractors have been tempted by non-compliant schemes that reduce tax liability by disguising remuneration as something else. The FCSA points out that these schemes should be avoided at all costs and says it is lobbying for them to be outlawed before the new legislation is introduced.

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