Global menu

Our global pages

Close

After the Election, what next for IR35?

  • United Kingdom
  • Employment law

20-12-2019

Back in July, HMRC confirmed 6 April 2020 as the commencement date for implementing changes to the off-payroll (“IR35”) working rules for the public sector and medium and large private sector businesses.

Now, with a new Conservative Government in place and a review of IR35 promised, we consider below the latest IR35 developments and how employers should respond.

Background

Under the proposed changes to IR35, where a worker provides services to a medium or large business (the “client”) through an intermediary (whether directly or through an agency) and the worker will personally perform the services, then IR35 applies. An intermediary is typically the worker’s personal service company.

Where IR35 applies, the client is required to:

  • decide whether the worker would be an employee if the client contracted directly with the worker (so-called “deemed” employment status)
  • communicate this decision in a “status determination statement” to the worker and to the organisation that the client contracts with for the supply of the worker’s services
  • adopt a “status disagreement process” to address any disputes over the status decision
  • if the client pays the intermediary directly, deduct and pay employment taxes to HMRC

A failure to comply with the IR35 Rules may result in the client (or others in the labour supply chain) incurring employment tax liabilities in relation to the worker’s fees for which they would not otherwise be responsible.

The existing IR35 rules for the private sector will continue to apply for small organisations. The existing public sector IR35 rules will also change as part of the process of extending them to the private sector, meaning that the public sector will also experience IR35 change in 2020. Read our briefing for further information on these changes to IR35.

It is important to remember that IR35 is a tax and not employment status issue. It does not automatically follow, for example, that unfair dismissal and redundancy pay rights would apply for an individual with deemed employment status for tax purposes. One can see, however how tax status could have a persuasive effect on a claim for employment status for employment rights.

Recent developments

Outstanding legislation and guidance

Legislation needed to implement the IR35 changes in April 2020 has not yet been finalised. A Bill had been published before the election, but it will need to re-start its journey through the new Parliament. This legislation, together with proposed amendments to the Social Security and PAYE regulations and HMRC’s detailed guidance on the new rules, once released, will provide some clarification on the application of the new rules, including on the transfer of tax liabilities.

A new version of CEST

In the meantime, HMRC unveiled its improvement to the Check Employment Status for Tax tool (“CEST”) and published updated guidance for users on the factors used to make status determinations.

CEST is HMRC’s online tool containing questions aimed at collecting information in order to assess a worker’s employment status for tax purposes. For example, the degree of personal service and any right of substitution, financial risk, control and integration into the business. In the context of IR35, clients can input information, based on the individual facts of that engagement and CEST will then give HMRC’s view on whether deemed employment status applies. To incentivise its use, HMRC will stand by the CEST result – providing the information inputted is accurate and not contrived.

CEST has attracted criticism over its reliability, with HMRC coming under mounting pressure to reform its contents. The new version of CEST, used together with the guidance, marks an improvement. However, concerns remain over its compatibility in some areas with the approach taken by recent tribunal decisions on employment status. In addition, an online tool is inevitably less reliable in borderline cases where individual facts and nuance must be weighed in the balance.

A review of IR35

While the Conservative manifesto was silent on IR35, the Chancellor, Sajid Javid, stated during election campaigning that the Party would review the IR35 changes as part of its commitment to support the self-employed. However, the extent of any review is currently unknown and the Chancellor refused to say whether the review would result in the April deadline being deferred.

Comment

In summary, while an IR35 review has been promised and implementing legislation has not been finalised, there have been no suggestions as yet that the Conservatives will reverse their approach to IR35. Instead, a review might suggest improvements to the operation of the IR35 rules and/or delay the April implementation, reflecting criticisms voiced by both contractors and tax experts during the consultation process.

In the meantime, employers using contract and freelance labour should continue planning for IR35 changes until the Government’s intentions become clear, given the risk of potentially significant tax liabilities. For example, by securing executive agreement to a new off-payroll working policy/strategy, auditing existing contractor arrangements and determining their deemed employment status, changing hiring/payroll systems and supplier contracts to enable IR35 compliance and, if appropriate, to add information-sharing obligations and indemnities/warranties.