How much do you know about IR35?
Posted on 30th September 2019
It was announced in the Autumn 2018 budget that IR35 public sector reform is to be extended to the private sector, albeit it won’t apply to smaller firms that meet certain criteria. For IT contractors, their employers and agents, the single biggest concern is how Off-Payroll working (commonly called IR35) will affect their businesses, whether as independent contractors or as one of the many firms that employ these contractors.
When IR35 was introduced to the public sector in 2017, organisations only had 12 weeks’ notice to prepare. This time, for the private sector, the (previous) Chancellor gave the business world to April 2020 to get ready. There have been two government consultations on the subject, the second of which closed on 28th May 2019, with the results published in July. However, irrespective of the results of these “consultations,” it is clear IR35 plans for the private sector will be implemented in full by HMRC come April 2020.
Be-IT has a substantial number of contractors working through its books so clearly it has a commercial interest in the subject, but, more importantly, the changes to IR35 will have a profound impact on the entire IT sector. Given the importance of technology to all our futures, in our view it’s incumbent on government to do nothing that makes it more difficult for the sector to prosper. We have not been convinced that IR35, and especially the ways in which it will be implemented, will be beneficial for the individuals affected, the industry as a whole or, indeed, the wider economy.
With that in mind, we commissioned a third-party researcher to conduct an independent study, investigating both contractors and employers’ knowledge of IR35 and its implications for individual contractors, their agents and the employing companies across the private sector. We also received professional guidance on IR35 from a CTA to ensure we got the facts right.
The purpose of this study is to investigate employers’ and contractors’ knowledge of, and concerns about, IR35 and its implications for the private sector.
To that end, the questions were split into two sections: one for contractors and one for employers. The questions asked cover more or less the same range of topics in each case, but with some minor changes so that they make sense from each perspective, whether as an individual contractor or an employing company. A key section of the questionnaire seeks to find out how much respondents actually know about the subject of IR35 and this is followed by a series of questions asking respondents what they believe the impact of IR35 will be for themselves or their businesses, especially as regards the amount of tax they might have to pay. Finally, there was a small section asking those who have already been through the roll-out of IR35 in the public sector to tell us about its impact there.
- We have serious concerns about the lack of knowledge about IR35 amongst contractors and employers. A substantial percentage of respondents were unable correctly to answer a number of questions, each of which asked them to say whether a statement about a key aspect of IR35 was true or false (see Qs.6 and 21). For example, these included: fewer than 10% of contractors and no employers are aware that sole traders are exempt from IR35; some 29% of contractors and 38% of employers believe that it is the contractor who is responsible for deducting PAYE (it is the final employer’s responsibility); a substantial number (75% of employers and 41% of contractors) think that all contractors, agents or umbrella companies, regardless of size, will fall under IR35. Note it is only small companies as defined by the Companies Act 2006 (i.e. with two or more of the following - a turnover of £10.2M or less, £5.1M or less on its balance sheet, and those with 50 employees or fewer) that are exempt. Medium-sized companies as defined by the Companies Act 2006 will be caught by the new legislation.
- Very few of our respondents had taken part in the recent government consultation (only 10% of contractors and none of the employers). Bearing in mind that the vast bulk of responses to our survey came before the government consultation reported its results, almost all of our respondents (90% of contractors and 100% of employers) believed that the government intended to create a mirror image of the public sector IR35 legislation. This pessimism has been borne out by the proposals for the new IR35 legislation published by the government on July 11th and with basically no concessions or revisions of what was originally planned. See: government rules and government consultation.
- Virtually all (96%) contractors surveyed deliver their services via a Limited company.
- Nearly one third (31%) of contractors are thinking about becoming a permanent employee, with a further 42% undecided and only 27% intent on continuing to work as a contractor. If followed through, this could have profound implications for the way in which IT projects are delivered by the private sector. For employers, 44% expect that contractors will seek to become permanent employees, with only 11% thinking that there will be no change in the number of contractors working for them.
- Virtually two-thirds (65%) of contractors and employers (67%) would be prepared to accept a terminal bonus upon completion of a contract. This would increase the financial risk to the contractor, thus, potentially, helping put them outside IR35, although, as we explain below, this is certainly not guaranteed. Contract and client may think this is a potential loophole but it may be more complicated (see below)
- Providing a substitute contractor (substitution) to work on part of a contract is recognised as one of the ways in which a contractor might be outside IR35. 56% of employers were not prepared to consider such substitution, but, unsurprisingly, a clear and resounding majority (86%) of contractors would be prepared to do this. However, as with the terminal bonus issue, this ‘loophole’ is by no means guaranteed.
- When asked specifically who is responsible for informing a contractor that he or she comes under IR35 (or not, as the case may be), there were considerable levels of ignorance, with 44% of employers and 28% of contractors not being aware that it is their responsibility.
- The vast majority expect IR35 to increase their tax bill, with 97% of contractors and 89% of employers expecting this to happen. This may explain why so many contractors are considering (Point 4 above) whether to continue as self-employed.
- Nearly half (46%) of contractors believe that their tax will increase by between 15% and 25% under IR35. Less than one third (37%) think their tax will grow by 15% or less. Employers are more pessimistic, with three-quarters (75%) believing that contractors’ tax bills will grow by between 15% and 25%. Will this lead to contractors increasing their rates?
- Interestingly, and following on from point 9, two-thirds (67%) of employers are not planning for an increase in contractor costs after IR35 is implemented.
- Some 70% of contractor respondents who have experience of using the CEST in the public sector said that it is not easy to use.
- Of those contractors who had experience of the CEST tool in the public sector, exactly two-thirds (67%) said that it had put them outside the scope of IR35.
- Of those contractors who work(ed) within IR35 in the public sector, 85% say they pay more tax and only 15% pay less tax than they did previously. This will not be good news for those contemplating what they might do when IR35 hits the private sector.
- When it comes to the sources respondents use to find information on IR35, accountants (cited by 67%) were, perhaps unsurprisingly, the most popular with contractors, closely followed by online magazines (64% of respondents used them). Employers, in contrast, are far more likely to go to a recruitment agency (55%) or a solicitor (44%).
As IT recruiters, we are concerned about the relative lack of knowledge about many key aspects of IR35. While ignorance of the law is no excuse, the results of this survey suggest that HMRC really does need to beef up its marketing and run (a lot) more “information and advice” campaigns about IR35 before April 2020. Parallel with this, it’s incumbent on contractors to ensure they really know what IR35 involves and how it might affect them.
Of those contractors who work(ed) within IR35 in the public sector, 85% say they pay more tax and only 15% pay less tax than they did previously. This study suggests most respondents expect to be clobbered for a lot more money by the government, with all that implies for their desire to continue working as a contractor over the next few years.
From a political/economic point of view, the government needs every penny it can get as there is the small issue of Brexit on the horizon (at least there is at time of writing) and, if the runes are correct, a global recession coming soon (with much of the firepower required to tackle it already used up since 2009). However, it is Brexit specifically that exercises the UK public and it seems a Keynesian boost is coming, with huge investment in a wide range of public projects, including, we hope (and the new Prime Minister has explicitly mentioned these), a vastly speeded-up roll-out of fibre broadband and significant changes to immigration policy (contractors who are not resident in the UK for tax purposes are exempt from IR35). While the new Chancellor seems intent on borrowing to fund these measures, it is unlikely that, having identified the growing army of self-employed as one of the areas where there is potential to pluck the goose of taxation a bit further, the government will gladly accept any additional tax HMRC can gather. Much of the current tax strategy vis-à-vis the self-employed is a result of the previous Chancellor’s views on the economy and the Taylor Report (Review of Modern Working Practices) was part of his response to the growing numbers of contractors and levels of tax they pay. However, with the recent change of Prime Minister (again, correct at time of writing), there may be a change of thinking here, but we doubt it! IR35 doesn’t look good for private sector IT contractors…
Gareth Biggerstaff, CEO, Be-IT
Read the report here
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