IR35 could be coming to the private sector

The recent case of Lorraine Kelly and her working arrangements has brought into focus again the Government’s plans to expand the current rules regarding the clamp down on the status of consultants and contractors in the public sector to the private sector. The legislation, known as IR35, was strengthened for the public sector in 2017 and now there is a consultation running until 28 May 2019 in respect of expanding the legislation into the private sector.

In short, the changes will push the determination and associated tax liabilities of whether an individual is an employee or self-employed onto “the client” – broadly this is the end user of the individual’s services. This is a substantive shift from the current position and involves a consideration of the status of the individuals whether they are engaged through a company or as an individual.

The current proposals are to include businesses that have at least 2 of the following characteristics:

• more than 50 employees,
• turnover in excess of £10.2m,
• or a balance sheet in excess of £5.1m

For businesses that are required to undertake a statutory audit, as they will be responsible for determining the status of their workers, there is an increased risk of incurring additional PAYE, employees and employers’ national insurance if workers are deemed to be employees by HMRC but have not been treated as such – there will also be interest and penalties to pay. Accordingly, self-employed workers deemed to be employees will find their tax liabilities dramatically increased, so getting it right is imperative, but potentially quite tricky as it is a grey area.

Clearly this change, if implemented, represents an increase in the risk to large private sector businesses who want to engage self-employed individuals as they will be responsible for assessing the employment status of the individual. From the individuals’ perspective, there may well be reluctance from larger businesses to engage self-employed individuals and a move towards an employment relationship.

There is help at hand (or not) via the Check Employment Status for Tax (CEST) tool supplied by HMRC that enables businesses to check if individuals are employees or self-employed. However, a recent BBC documentary found the tool was unable to give definitive answers in around 50% of cases – not a particularly satisfactory position.

The consultation still has a couple of months to run, however we are not hopeful of any substantive changes, as many recent consultations have merely been trailers for the implementation rather than real consultations.

In some form these changes are coming, and we will be keeping a watching brief, particularly for the latest developments following the closure of the consultation.