Stephen Perrin, Consultant CFO - Cedar IR35 legislation, Contractor, Income Tax...
The contracting world breathed a collective sigh of relief when the Chancellor granted a temporary stay of execution from implementing the public sector IR35 rules in the private sector.
There are undoubtedly many contractors and their “employers”, who have exploited the inherent weakness in the current IR35 rules to mutually benefit at the expense of the public purse and that alone is enough to warrant a tightening of the rules. However, for a large number of contractors, the public sector rules are proving unsustainable. The problem is not whether an assignment is inside or outside of IR35, which contractors should have been assessing all along, the problem is in what happens if an assignment is found to be inside IR35.
Under the previous IR35 rules, if a contractor deemed their engagement to be inside the scope of IR35 a mechanism existed for them to assess the additional Income Tax and NIC’s payable, taking into account legitimate costs, pension contributions, a small allowance to offset the costs of running their company and the Income Tax and National Insurance Contributions they have already paid. In essence, the previous IR35 legislation recognised that even when, for tax purposes, the relationship was that of employer-employee, the contractual relationship was still, in most cases, categorically B2B and the contractor was in business with all the resulting costs and obligations.
By comparison with the old rules, whilst the stated objective of the new public sector IR35 rules was to provide for tax parity in cases of disguised employment, it does so without any regard that the contractor still has the unavoidable costs and obligations of running their own business, which many do. As a result, many contractors are now worse off, in many ways, than their employed counterparts, with few, if any, redeeming benefits.
The public sector rules have been a bitter pill swallowed and their side effects are still far from being fully appreciated.
What of the private sector then?
The private sector engages contractors because of their flexibility, because of their skills and because they do not want to employ someone for the task in hand. The private sector will already be concerned that a contractor being deemed inside IR35 will increase cost, administration and risk, and they will be keen to develop mitigation strategies.
Obviously, in the absence of legislation, due to be included in the 2019/20 Finance Act, nobody knows what shape the final regulations will take. What we do know is that they are likely to closely resemble the public sector rules, with an exemption for small businesses, and there will be little time to implement them if they are to come into effect in April 2020 as already stated.
Many will hope the political instability of the current government and the uncertainty of Brexit will force some form of U-turn or softening of the rules, but barring that, for businesses having to apply the rules, 2020 will see a change in the dynamic between contractors, employment businesses and the businesses that use them.
The fuse is lit, the fireworks are coming!