How should the private sector manage IR35 reform?

With tax legislation affecting contractors potentially on the horizon, now is the time to act

Despite the news of a consultation on the topic, 5.5 million private sector businesses and thousands of recruitment agencies are waiting to see whether reform will be extended beyond the public sector in due course.

The IR35 is the complex and controversial law designed to stamp out tax avoidance. It targets contractors working through their own limited companies, or partnerships whose working relationship resembles employment rather than self-employment.

If reform is rolled out to the private sector, the responsibility for determining the employment status of contractors could be shifted to the private sector companies engaging them, much like in the public sector.

Given that many private sector companies lack the knowledge and in-house resource to make these kind of determinations accurately, there is widespread fear of potential reform.

If private sector reform resembles April’s public sector changes, the liability for any missing tax (in addition to the decision-making) will sit with the companies, should HMRC deem them to have made an inaccurate decision.

But this isn’t a time to panic about expected changes. It’s a time to prepare. Despite private sector reform not being a certainty, the signs suggest it will happen at some point. HMRC believes public sector changes have been a success and continues to drop hints regarding further reform.

Because of this, private sector companies must get the ball rolling and begin communicating with their contractor workforce. Predicted reform can be managed, contrary to speculation, but it requires companies and – when involved – agencies to ensure they are capable of making accurate IR35 determinations well before new rules are enforced.

Mistakes made following public sector reform can’t be made again. For contractors to continue working on private sector projects, companies must make individual and well-informed IR35 determinations. The lead up to, and the aftermath of, public sector reform was chaotic as engagers made blanket ‘inside IR35’ determinations to protect their liability. And the dust has only really just settled on this.

Regardless of any similarity between the working arrangement of any two contractors, each determination must be made individually and on a case-by-case basis. Blanket determinations are short-sighted and will only increase the chances of wrong IR35 decisions.

Companies must also remember that HMRC’s CEST tool – the technology built to set IR35 status – is not mandatory. Since its release, CEST has been criticised for being tweaked on-the-fly and for giving what some experts consider inaccurate IR35 decisions.

To assist in the process, companies can seek the advice of specialists to help them make accurate decisions on a large scale. Private sector companies should also assess their existing contractor workforce, not simply the new workers they engage. For obvious reasons, HMRC pays more attention to actual working practices, rather than what was agreed at the beginning of a project.

Collaboration between each party in the contractual chain is essential too. You cannot make a well-informed determination without the input of the engager, the recruitment agency and the contractor.

The IR35 consultation – in which the government will assess public sector changes and explore the possibility of private sector changes – will shed more light on the future of this complex legislation. But given the high chances of further reform in time, companies must assess their current processes sooner rather than later.

Seb Maley is CEO of Qdos Contractor