Do IR35 changes apply to your private sector business?

Reports recently surfaced which suggest many of the private sector companies that will be responsible and often liable for IR35 from April 6th 2020, have no idea about the legislation, nor the impending changes.

It was an issue raised in the IR35 forum, in which well-respected voices from the contractor sector called on HMRC to increase the level of support it offers medium and large private sector businesses in the lead up to reform next year.

Given there is a lot of confusion around IR35 and the incoming changes already, tax experts have become increasingly concerned that mistakes could be made when these companies administer IR35. They fear this could result in contractors being wrongly placed inside the scope of the legislation.

From April 2020, a company’s liability could rest on whether they have made the correct IR35 decision. Therefore, it’s important that private sector businesses have a firm enough understanding of the rules. Above all else, this grasp of IR35 should start with knowing if it applies to your company or not.

‘Small’ companies exempt from changes

After listening to the concerns of IR35 specialists, the government plans to excuse ‘small’ companies from reform in the private sector. This means the rule changes will only apply to medium and large businesses that, in HMRC’s eyes, are better placed to manage IR35.

The reasons for excluding small businesses centre on the lack of resources these companies have to administer IR35, along with the fact that the private sector is far bigger than the public sector. Specialists say the government stopped short of rolling out reform to all businesses engaging contractors because they want to focus on getting things right with medium and large enterprises first.

But what constitutes a ‘small’ company? Well, HMRC’s take on it is that any business with an annual turnover of up to £10.2m, a balance sheet total of up to £5.1m and up to 50 employees falls into the small category. Anything above any one of these criteria and the company is considered a medium or large enterprise and will therefore be responsible for IR35 decisions from next April.

While, on the face of it, this seems fairly clear, HMRC has been criticised for its definition of a small company. Sceptics say there is a chance that smaller subsidiaries of medium and large companies could circumvent the rules, despite technically being part of much larger businesses.

However, this is something the government could shed light on in the coming months when HMRC publishes the draft legislation, which will be released sometime this summer.

Does this exemption apply to ‘small’ agencies too?

Unfortunately not. All recruitment agencies irrespective of size will be either directly or indirectly affected by IR35 reform. As is the case in the public sector, the fee-paying party, which is often the recruiter, will carry the liability unless HMRC decides the end-client has made blanket IR35 determinations, which are not compliant.

In simple terms, this means that even one-person recruitment companies that place contractors with medium or large businesses could be held liable for any incorrect decisions made by the end client.

Even if as a recruiter you do not handle payments to contractors, meaning your company will not carry the liability, you are advised to get ready for these changes. Contractors will be more likely to work through an agency that helps companies make correct IR35 decisions.

What happens to contractors working with small companies?

Contractors working with clients that are considered ‘small’ under HMRC’s guidelines will retain the power to set their own IR35 status. While this was a move widely welcomed by tax and employment experts, there is a possibility that HMRC will look to extend the rules to include small businesses in due course.

Staying up to date with IR35 private sector changes

With numerous updates to IR35, familiarising yourself with this legislation will help you make the most informed decisions. Our IR35 Resources section is full of guides, calculators, rules and articles that can help you stay current and compliant.