The latest IR35 Forum minutes from HMRC confirms that the infamous IR35 reforms that hit the public sector last year can become a reality in the private sector from as early as April-2019. This means Private sector contractors can be worse off by 25%. Imagine reduction in income by 25% should this become a reality in April 2019, which looks extremely likely.
Notwithstanding the concerns raised by the forum committee, HMRC is adamant on rolling out the reforms in the Private Sector. The main reason cited for such immediate action is the ‘exchequer risk’, meaning HMRC aims to cover the tax shortfall through the changes.
The public-sector reforms that were rolled out last year, has been nothing short of a complete catastrophe; increasing non-compliance and the rise of tax avoidance schemes through dubious umbrella companies. HMRC’s Check Employment Status for Tax (CEST) tool used by companies for assessing the contractors IR35 status, did not have any resemblance to case laws adding more to the confusion and resulting in use of blanket approach by many public-sector companies to avoid non-compliance. Who is the eventual looser in this catastrophe? No one but the poor contractor. Contractors end up with non-compliant umbrella schemes to maintain higher returns or get blatantly penalised as within IR35 and get less income in hand affecting their current lifestyle.
What next for Contractors? Is this the end of happy days?
From the earlier budget document an estimated 3.7 million contractors work off-payroll in the private sector. Many of them may be genuine contractors but the issue to be addressed is the end client’s reluctance to assess the status of each contractor because of the compliance burden and the risk of facing a huge tax bill if successfully challenged by HMRC. If numbers are to be trusted, out of the total 26,000 public sector contractors; only 13% have been personally assessed for their IR35 status and the rest have been put under a blanket decision.
The biggest worry is that similar practices may happen in private sector. Falling into the trap of IR35 can increase a contractor’s tax liability by circa 25%, so it’s imperative to ensure that IR35 does not apply. HMRC’s CEST tool clearly lacks the legal foundation to deliver accurate results and cannot be trusted.
Best approach here is to take proactive action and become IR35 compliant before April 2019. Contractors can assess their IR35 status by using DNS IR35 Testing tool. The test is completely free and takes only 15 minutes to complete; giving instant results that are backed by case- laws. Along with the test it is also important to get the contract reviewed periodically, to ensure its absolutely watertight for IR35. Contractors assessing their own status can significantly reduce end clients burden and prepare themselves for the inevitable IR35 changes. So, all is not lost, and future can still be bright.
HMRC has recently won its first IR35 case in seven years against a BBC presenter. The presenter has been asked to pay £419,151 in income tax and national insurance. This can be the beginning of many IR35 cases that may soon emerge following this case. The case clearly highlights the significance of assessing one’s IR35 status and should serve as a push for contractors to complete compliance.
Contact DNS Associates to understand your IR35 exposure.