While the Budget announced an increase in the national living wage from £7.83 to £8.21 per hour from April 2019 and a reduction in the contribution that smaller employers need to pay toward apprenticeship training from 10 per cent to five per cent, the hottest development in the employment sphere was the extension of the IR35 regime.
As expected, the government announced that it will extend to the private sector the reforms it has implemented in the public sector to off-payroll working rules (known as IR35). The decision to defer its implementation until 2020 and limit its application to large and medium-sized businesses will be a welcome reprieve for many organisations.
This extension is the latest development in the ongoing scrutiny by both the courts and HMRC of the contractor element of the workforce. Introduced nearly 20 years ago, the IR35 rules were intended to ensure that individual contractors working through an intermediary (usually, but not necessarily, a personal service company), who would be regarded as employees if engaged directly by the end user, paid broadly the same income tax and National Insurance contributions (NICs) as if they were employed.
In the private sector it is currently the intermediary’s responsibility to assess whether IR35 is engaged and to pay tax and NICs accordingly. Significantly, this means that the tax risk lies with the intermediary rather than the end user.
From April 2020, it will become the responsibility of the engaging business to determine whether IR35 applies to the contractors it engages via an intermediary and, if so, to pay tax and NICs on the sums paid to that intermediary for the contractor’s services.
Although a further consultation is awaited on the detail of the reforms, HM Treasury stated in its briefing that 1.5m smaller businesses will not be caught by the reforms. It also indicated that the emphasis will be on ensuring compliance rather than pursuing historic cases, and that it will continue to develop guidance to help businesses determine whether IR35 applies.
The reforms announced this week will not affect arrangements where businesses engage genuinely self-employed contractors through an intermediary. While HMRC has developed the Check Employment Status for Tax (CEST) service to help businesses determine whether the IR35 rules apply, this has been the subject of criticism. The issue of deciding employment status with any certainty, both from an employment rights and tax perspective remains complex.
Advice for business
Businesses engaging contractors through intermediaries would be well advised to start assessing the impact of the changes and considering their reaction. This might include:
- reviewing the number of contractors working through intermediaries in the current workforce and any future plans which might affect this number;
- implementation strategies, for example, the development of relevant internal processes, appointment of dedicated teams to deal with employment status issues and the increased administration around these;
- internal education about IR35 and its implications;
- considering how engagements are structured and implemented in practice – bearing in mind the courts and HMRC will look at the reality of a working arrangement not simply how it is documented;
- whether to replace positions currently filled by contractors with employees (possibly on a fixed term basis). Although this would bring certainty around tax status and employment rights, it would incur additional costs. For example, in relation to paid holiday, pension contributions and benefits as well as increased statutory employment protection. This might also affect an organisation’s ability to attract the relevant specialist skills and flexibility that the contractor population can provide;
- budgeting for any increases in contractor costs; and
- considering using third party contractors to provide a workforce to manage the PAYE risks from the new rules.
Sarah Ozanne is of counsel and Edward Arnold a senior associate in the employment team at CMS Cameron McKenna Nabarro Olswang LLP