It’s almost been one year since the IR35 reform came into effect in the private sector.
The changes, which mirrored those introduced in the public sector in 2017, shifted the responsibility for determining a contractor’s status to the business engaging them. As a result of the reform, the fee-paying party – either the end client or recruitment agency – was transferred the IR35 liability.
Recognising the challenges businesses faced, HMRC allowed a so-called ‘soft landing’, meaning financial penalties wouldn’t be issued for non-compliance in the first twelve months. That year is up on 6th April.
From here, businesses could be hit with penalties in addition to huge tax bills, plus interest for non-compliance. And the tax authority has already stated that it has begun its IR35 compliance checks.
Looking back on the first year of IR35 reform in the private sector, by no means has it been plain sailing for contractors, nor the businesses engaging them for that matter.
In addition to non-compliant blanket IR35 determinations and needless contractor bans, numerous government departments have been handed tax bills worth millions of pounds.
In this article, we reflect on the main events from the past year…
Not long after the roll out of reform, it emerged that former England striker and TV presenter Gary Lineker was appealing a £4.9m IR35 bill. HMRC claimed he owed £3,621,735.90 in Income Tax and £1,307,160.46 in National Insurance Contributions.
The bill related to work Lineker had undertaken between 2013 and 2018 with the BBC and BT Sport. The Match of the Day host had worked via his limited company, which he’d set up with his then wife.
However, the tax authority argued both contracts resembled employment and fell inside IR35. While we await the final outcome of this case, the staggering sums involved have been a firm reminder of the importance of IR35 compliance.
In the past year, it has come to light that five government departments have been penalised for historic IR35 errors and non-compliance, and handed tax bills that amount to £263m.
In November, news broke that ex-Sky Sports presenter, Dave Clark, lost his IR35 appeal.
A First Tier Tribunal ruled that the contracts held between Clark’s limited company – Little Piece of Paradise Limited – and Sky were inside IR35. As a result, it was decided that Clarke owed the taxman £281,000 in Income tax and National Insurance Contributions.
While this was a win for HMRC, given the stark differences in contracts and working practices between a presenter such as Clark, and a typical IT contractor, it has little – if any – bearing on the majority of contractors who, in our experience, are able to demonstrate their outside IR35 status with relative ease.
Having surveyed over 2000 contractors immediately after IR35 reform landed, we followed up with another questionnaire in November.
Our findings showed an 83% increase in the number of contractors being determined outside IR35 by businesses – rising from 35% in April to 64% in November.
Above all else, this 83% surge in contractors operating outside IR35 suggests businesses are getting to grips with reform and placing genuinely self-employed contractors outside the scope of the legislation.
In recent months, three major reports into IR35 reform have been published – two into public sector changes introduced in 2017 and one exploring the impact of reform in the private sector.
The tax authority tasked IFF Research and Frontier Economics to look into the long-term impact of the reform on public bodies.
Remarkably, the report claimed the impact was minimal, with two-thirds of central government and individual public bodies reporting no change in the number of contractors it engaged outside IR35 since the reform.
It also claimed that just 1% of organisations had made blanket determinations.
The second was an investigation into the implementation of IR35 by the National Audit Office (NAO). The report slammed the government for the “little time” public sector bodies had to prepare, which meant mistakes were “highly likely” to occur.
It found that HMRC’s CEST tool failed to make IR35 determinations in 15% of cases, which increased to 20% after it was allegedly improved in 2019. The report also noted there was no legal route for contractors to appeal a client’s IR35 decision.
The third review was the Finance Bill Sub-Committee Follow-up Inquiry, which builds on the investigation into the proposals for private sector reform in 2020.
Like the NAO investigation, the committee found CEST to be “not fit for purpose” and that 20% of cases being undetermined was significant and “more must be done to improve” the tool.
It also highlighted that the trend in blanket determinations had continued in the private sector and contractors placed inside IR35 are taxed like an employee but have zero employment rights.
More recently, TV presenter and journalist Adrian Chiles won a £1.7m IR35 case after a seven-year battle. HMRC had handed Chiles two bills – one for Income Tax totalling £1,249,233 and the other for National Insurance Contributions, for £460,739. These amounts focused on the period between April 2012 and April 2017, relating to the work he had carried out for the BBC and ITV.
HMRC had tried to argue that his contracts fell inside IR35, but the judge ruled that Chiles was in business on his own account and the contracts were for services, not employment. As a result, IR35 didn’t apply.
There’s no denying that IR35 reform has caused disruption and confusion for contractors. But as our research shows, the number of companies taking a fair and pragmatic approach to the changes is on the rise as the dust continues to settle.
Want more information about IR35 reform and its impact? Take a look at our 'IR35 reform: One year on' hub for further details.
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