UK - Preparing the private sector for IR35


Two years after it was implemented in the public sector IR35 guidelines will be implemented into the private sector but complications remain, Accountancy Age reports.

Is the private sector ready for IR35

12 months remain until IR35 is introduced into the private sector but the complex legislation has still not been perfected for the public sector. With the further complications the private sector brings, questions remain about what benefits the change will actually bring.

Gordon Thrower - senior tax manager at MHA MacIntyre Hudson - says, “Businesses in the private sector [that] engage workers operating through limited companies should note that there is only a year to go before a major shake-up of the rules that apply to such engagements—the so-called IR35 rules.”

Consultation document

Following the release of the consultation document, addressing the potential benefits and problems arising from the implementation, Nigel Morris - employment tax director at MHA MacIntyre Hudson - said, “The consultation shines a spotlight on the additional complexities of rolling out the IR35 changes to the private sector.”

Of the release, Mr Thrower said, “HMRC recently issued its consultation on the new proposals, which, from April 2020, will extend to the private sector the changes introduced to the public sector in April 2017.

“These changes transferred the responsibility for deciding whether PAYE should be operated on payments made from the worker’s company to the public sector payer. Where the new rules applied, the public sector payer was then left with the subsequent burden of operating PAYE on payments, as if the worker were an employee.”

Criticism

The IR35 has been criticised for its transfer of responsibility to the employer. Mr Thrower said, “From the private sector engager’s point of view, the administrative cost of making those decisions alone could be significant, as the rules require that each arrangement should be reviewed on its own merits.”

“This will require a lot of time and effort on the part of businesses, whose staff may not necessarily have sufficient expertise to do such reviews justice—particularly if the business has numerous contracts in place.”

Costs of the Employers’ National Insurance will increase for private sector businesses. Adding further financial strain for employers “engaging workers through their own companies” as it is questioned whether the Apprenticeship Levy applies to a private sector business

Gordon Thrower says, “Given the experience encountered by public sector engagers two years ago, it would be prudent for their counterparts within the private sector to consider commencing reviews of engagements involving limited companies sooner rather than later. This will allow them to identify affected engagements and evaluate the potential impact, financially and practically. Changes can then be planned for contracts and pay dates to ensure compliance before 6 April 2020.”

Will IR35 work in the private sector?

There are concerns that the current IR35 rules in the public sector will not work in a sector where every business is different. Nigel Morris explains, “The consultation proposes defining whether an unincorporated business is small by the number of its employees.”

He continued, “This is a questionable approach, given a company might qualify as small only if it defines members of its workforce as off-payroll, the whole crux of the issue IR35 is trying to address.” Adding “It has always been the intention to exclude small businesses from the rules, but there is still no watertight definition of what will constitute a small business.”

This complication was reportedly not a problem for businesses in the public sector where “the rules apply to all.”

“However, in the private sector, the size of the business will be a crucial factor,” Mr Morris said.

Do small private companies need to implement IR35 rules?

Mr Morris said, “The current consultation suggests using the definition of small company from the Companies Act 2006, but this only applies to limited companies. He continued, “If you are a small unincorporated business – for example, a sole-trader or a partnership – you probably need to tread very carefully and take appropriate advice before concluding you are safe from IR35.”