Extension of IR35 to Private Sector

The Government confirmed over the summer that it will extend IR35 rules to the private sector from April 2020.

IR35 is a rule applied by HMRC where an individual provides services personally to a client via a service company (intermediary) and if the intermediary did not exist, they would be considered an employee of the client – what HMRC calls a ‘disguised employee.’ Many contractors provide their services through an intermediary company and so the rule has wide application. From April 2020 it will be the client’s responsibility to assess the individual’s employment status and operate PAYE/NICs as appropriate on the fees paid to the intermediary. They will need to provide a ‘status determination statement’ confirming their IR35 determination, to both the individual and the party with which the client contracts (i.e. the intermediary or the relevant agency). In working out whether the contractor would be an employee of the client, clients need to apply all the usual employment status tests. These look at various factors, such as: whether the contractor is subject to control; has a right of substitution; is integrated into the client’s business or is carrying on business on their own account; and whether there is mutuality of obligation between the parties. The tests are notoriously difficult to apply in practice as illustrated by the case law in this area, with similar factual situations producing conflicting outcomes.

The IR35 reforms are probably the most significant change to employment tax in decades, substantially increasing the administrative burden on businesses and, for those arrangements that fall within IR35, significantly increasing the costs of all parties in the supply chain.