New IR35 rules: what contractors need to know

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What will the reforms to IR35 legislation entail?

The in Autumn Statement 2016 the chancellor confirmed that in the public sector only, IR35 status be determined by the client and not the contractor.

If a client decides IR35 does apply, the contractor business will be taxed at source, through the Real Time Information (RTI) system, as if they were an employee.

Contractors impacted by this measure may have to pay tax like an employee even though their employment status will not change, meaning they will not receive the rights and benefits that go with employment such as pension contributions, holiday pay and unfair dismissal rights.

Is it the public sector client or the agency that will determine IR35 status?

The draft legislation puts the burden of responsibility on the entity that pays the contractor, often this will be an agency. However, agencies are unlikely to have sufficient information about the working practices so they will ask the client to give an opinion on IR35 status. It has been suggested that the legislation could be changed to make the client liable for the decision, even if the payment is being made by the agency.

Will clients bother with an IR35 assessment?

Public sector organisations are supposed to undertake an assessment of a contractor’s IR35 status to determine the tax treatment of payments. There are two main concerns with this; firstly, there is little faith that public sector bodies will be able to make an accurate determination of a contractor’s IR35 status, because the rules are so complex and rely on in-depth knowledge of case law, individual contracts and working practices.

Secondly, evidence is already emerging that some PSC clients are unwilling or unable to make this assessment for each of their engagements. Which will force all contractors onto the RTI system and effectively put them onto the payroll, without correctly considering whether this is the right arrangement or whether it reflects reality.

What does the future hold?

There is a lot still unknown with how the new legislation will work in practice. The real extent of the difficulties it will cause will not become apparent until the middle of 2017.

However it has become apparent that these rules are already driving contractors out of PSC and removing the specialist skills and expertise that they supply.