Robert Salter, an employment & expatriate tax specialist said: “ At a time when the Government has boasted about the UK being ‘open for business’, the new rules, announced in the Finance Bill, risk making it harder for companies to find the skilled staff that they require in a timely and user-friendly manner, and are step in the wrong direction”
The core changes that will be introduced from April 2020 are:
- Private sector clients will be responsible for assessing contactors’ “deemed employment” status from April 2020, shifting this responsibility from contractors as has been the case since the initial restrictions (known as IR35) were first introduced almost 20 years ago.
- When assessing a freelancer’s status, clients must complete a status determination (e.g. using the Revenue tool – CEST (Check Employment Status for Tax)); so in theory there can be no blanket assessments placing contractors inside IR35. One also needs to understand that the CEST tool is an “imperfect” way of assessing whether someone is genuinely an employee or self-employed – Salter highlights that even HMRC accepts that approximately 15% of all cases handled by CEST need to be considered in more depth, whilst the CEST tool doesn’t (at present) even include some of the traditional factors (e.g. mutuality of obligation) associated with assessing whether someone is an employee or self-employed.
- The draft legislation includes a new ‘client-led status disagreement process’ – though this falls short of the independent, 3rd party appeals process that many contractors were looking for. As a result, if a contractor disputes their status assessment they can only appeal to their client, who may have an interest in their contractors being inside IR35. Evidence, for example, from the public sector (which introduced rules on deemed employment a few years ago), suggests that many companies might introduce a “blanket policy” and treat all contractors as deemed employees and subject to PAYE and NIC withholdings from a wider “risk-management” perspective.
- The draft legislation includes clauses allowing for the transfer of the liability through the wider labour supply chain (i.e. so that the end company, for example, could be liable to PAYE / NIC, if other businesses in the chain had not undertaken the relevant status assessment or got this wrong). One could argue that this approach results in legitimate, compliant businesses being liable to the mistakes of other parties.
- Small companies remain exempt from the new legislation, as defined by the Companies Act.
Becoming a deemed employee and subject to PAYE and NIC on their earnings, could impact the cash flow of contractors significantly.
What does this mean for companies?
Salter said: “As the legislation is expected to be finalised by November 2019 and the changes introduced in April 2020, companies have only a limited period to start preparing for these changes. As such, whilst some changes may be introduced to the above proposals, it is important for companies to consider the impact of the changes on their “workforce” and understand:
- Which freelancers are likely to be impacted by the change?
- How are staff trained to do the appropriate assessments of contractor status (recognising that CEST, the Revenue tool does not (even per HMRC’s own figures) give a clear answer in ca. 15% of all cases);
- What changes the company may need to make to its positioning as an “employer”, to ensure that it has access to the required skills and expertise;
- How will it monitor the ‘wider labour supply chain’, if it is using other agencies and companies on a sub-contracted basis.”
What does this mean for contractors?
“Becoming a deemed employee and subject to PAYE and NIC on their earnings, could impact the cash flow of contractors significantly. In addition to the pure costs associated with becoming subject to tax withholdings in the same manner as employees, they will potentially lose the ability to claim some of their wider business costs (e.g. travel costs) as a deduction for tax purposes, whilst still suffering from the potential negatives of being a freelancer – e.g. unpaid holidays and a lack of steady work. In this situation, will more contractors closely consider the option of becoming regular employees?”