Employment Status and Off-Payroll Workers
The IR35 consultation is now closed, so what next?
The latest consultation on the extension of IR35 rules to the private sector was issued on 5 March 2019 and closed on 28 May 2019. The responses were used to inform the draft Finance Bill legislation. Some of the factors that will impact the construction sector are outlined below.
Small Business Exemption
It has always been the intention to exclude small businesses from the rules, but there is still no watertight definition of what constitutes a small business. In the public sector, where the rules already apply, the size of the organisation is irrelevant as the rules apply to all. However, in the private sector, the size of the business will be a crucial factor.
A legal no-man’s land beckons for small private companies: do they need to implement IR35 rules or not? The consultation suggested using the definition of a small company from the Companies Act 2006, but this only applies to limited companies. If you’re 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.
The consultation proposed defining whether an unincorporated business is small by the number of its employees. This is a questionable approach given that a company might qualify as small only if it defines members of its workforce as off-payroll, the issue that IR35 is trying to address.
Composite or Personal Services
IR35 does not apply to contracts categorised as self-employed. In the public sector, a move to contracts for the supply of composite services has helped manage the impact for the construction sector. However, the suppliers of those composite services will tend to be private sector businesses, who will from April 2020, need to consider how IR35 impacts them and their engagement of workers.
If the burden of operating IR35 leads to increased costs in respect of employers National Insurance Contributions (NIC), which is currently 13.8% and the application of the Apprenticeship Levy, then the impact on contracts, margins and costings could be significant.
Supply of Information
The government wants to ensure that all parties in the labour supply chain have sufficient information in order to comply with their obligations, proposing that the determination and the reason for the determination be cascaded to all parties in the supply chain. They therefore consider it necessary to legislate to ensure this happens, whilst at the same time suggesting that a client-led process is used to deal with any challenges to the determination.
The government suggests that such an approach, where the individual can raise a concern with the client that issued it, will lead to the client taking reasonable care when reaching its final view on the status determination. This remains to be seen!
This article featured in issue 13 of our Construction and Real Estate newsletter series.Real Estate Matters Issue 13
If you have any questions regarding IR35, get in touch with a member of our tax team on 01903 234094.
A version of this blog originally appeared on the blog of our national association MHA.