The UK Government has published a consultation paper considering options for improving compliance with the IR35 regime in the private sector (click here to read). The lead proposal is to extend the rules that currently apply to the public sector, to the private sector, thereby placing the responsibility for assessing the correct status of personal service company contractors, for tax purposes, onto the end user. The closing date for responses is 10 August 2018. As yet, there’s no indication of when any new rules would come into effect but April 2020 seems the most likely. Nonetheless, we believe that the changes will come into effect and, when they do, they will be hugely significant especially for those employers in the construction, engineering and financial services sectors who are heavily reliant on personal service company contractors.
So, what should private sector employers be doing now? We would certainly recommend the following steps to be taken as a minimum:
- Conduct an audit of personal service company contractors to identify those arrangements which bear a close resemblance to an employment relationship and which would, therefore, be directly caught by any changes;
- In ‘high-risk’ situations, consider moving your self-employed contractors onto employment contracts to better reflect their legal and tax status;
- In more finely balanced situations, consider changing the dynamic of the relationship to make it more comfortably within the self-employed category;
- Undertake early tax contingency planning and provisioning.
The difficulty employers will encounter is that many self-employed contractors will not want to accept a pay cut in order to move onto the end user’s books and, as many are highly-skilled and perform essential roles in businesses, they will have a strong bargaining position to insist that they are not financially worse off. Employers need to decide, will they play hard ball or will they commit the extra revenue to fund the additional tax and NICs burden? The other tricky area to navigate will be restrictive covenants. Contractors will hold out for flexibility and freedom to move onto the next job, where employers will want to put protections in place. Identifying a clear strategy and plan of attack now will inevitably reap rewards later down the track when the inevitable change occurs. If you would like any advice on how you or your business can tackle these changes, please contact Tiggy or Emma.