Government confirms IR35 will apply to private sector from 2020

Medium and large businesses have nine months to prepare for off-payroll legislation or risk significant impact on business performance and talent pool

Private sector organisations have just nine months to prepare for changes to off-payroll working rules that will put the burden of categorising contractors’ and contingent workers’ tax status onto the businesses that hire them.

From April 2020, businesses in the private and charity sectors will be required to check whether contractors and freelancers need to pay income tax and national insurance, as IR35 rules are extended from the public sector following the publication of the draft finance bill yesterday.

IR35 in the public sector has led to huge numbers of self-employed individuals being effectively categorised as workers, increasing the burden on HR professionals who are required to communicate the new arrangements with managers and contingent staff, as well as handling the associated administration.

The rollout of the rules into the private sector had been long awaited, but the announcement still sparked anger among lobby groups and businesses, many of whom warned that such measures were “unworkable” and voiced concerns about how long they would take to implement. 

Matt Fryer, group compliance director of Brookson Legal, said businesses shouldn’t wait until the Autumn Budget – which will ratify the changes – and should start taking action now to avoid a significant impact on their business performance and talent pool.

“In doing so, firms can avoid making ill-judged, last-minute decisions, like implementing a blanket ban on contractors – a mistake which led to a loss of talent from the public sector when the legislation was first introduced,” said Fryer.

The initial rollout of IR35 into the public sector was widely criticised for being rushed, and many public sector organisations are still struggling to attract and retain contractor talent.

A report released last year by the CIPD and IPSE, a professional body for contractors and freelancers, found more than half (51 per cent) of public sector hiring managers thought they had lost skilled contractors because of changes to IR35 rules, while nearly three-quarters (71 per cent) reported facing challenges in retaining their existing contractor workforce.

More recent research by Brookson Legal, published earlier this year, found less than half (47 per cent) of private sector organisations had taken steps to understanding forthcoming off-payroll legislation and already knew the percentage of contractors in their business that would fall inside IR35.

Conversely, more than a third (38 per cent) said they were “relying on gut feel alone” when it came to IR35 and its impact on their business, and another 15 per cent said they had “no idea at all” how off-payroll rules would affect them.

IR35 working rules have technically been in place since 2000 to tackle tax avoidance and ensure fairness in tax treatment. They are designed to ensure that an individual who effectively works as an employee, through their own personal service company (PSC), makes broadly the same tax and insurance contributions as permanent employees. 

In April 2017, the government reformed rules so that public sector organisations who take on contractors were responsible for making sure they and their workers paid the right amount in tax. Following a 12-week consultation published in May 2018, the government said it would extend IR35 rules to medium and large-sized organisations in the private sector.

But Tom Hadley, director and policy and campaigns at the Recruitment & Employment Confederation (REC), said the draft legislation risked damaging the UK’s productivity and labour market flexibility “at a time when it is most needed”.

“Making sure everyone pays the right tax is essential, but the rules need to be clear to be effective,” Hadley said.

“The last thing private sector businesses need at this time of Brexit uncertainty is rushed or poorly designed tax rules that add further uncertainty to an already fragile business landscape.”

Hadley, among other experts, called on the government to delay changes to IR35 until 2021. 

In its key recommendations submitted to the government’s consultation, REC argued against any exemptions for small companies as well as called for an overhaul of the much criticised Check Employment Status for Tax (CEST) tool – developed by HMRC to help organisations decide which contractors fell inside the off-payroll rules.

In the draft legislation, HMRC said this change would not be introduced until 6 April 2020 to give people and businesses time to prepare