IR35 2019 or 2020 or maybe a bit of both?
October 24, 2018
While all the smart money is on an announcement of new rules around IR35 in the Budget on Monday, there is much speculation as to whether the changes will come in in 2019 or 2020. I want to suggest a third option: the rules change for ‘larger’ organisations from 2019 but the change is only effective for ‘smaller’ organisations from 2020.
The UK economy benefits from a flexible labour pool. This will become more important as the economy changes over the next few years if we are to be at the vanguard of developing artificial intelligence, robots and other technologies. Tinkering with the supply of this workforce could be problematic. However, the Government feels that some contractors mis-classify their employment status for tax purposes and that this will cost the economy £1.2bn pa by 2022. The proposed changes around IR35 are all about making the end user determine the status rather than relying on the director of a personal service company, who is also likely to be the contractor themselves.
The Government wishes to move quickly to fix this issue however experience in the public sector suggests that checking the employment status of contractors is not straightforward, especially if you are a small business. Could the Chancellor consider implementing the change for large businesses first and then follow with smaller businesses? It is not to be underestimated how difficult it would be for larger businesses to make the change by 2019 but at least many of them have more resources to enable the change. Focusing on larger businesses first would also bring many of the very larger groups of contractors working in financial services into the new rules quicker.
So the question would then become ‘What is a large business?’. We have various different tests used in the tax system at present. For example, large businesses for corporation tax purposes are those that have profits in an accounting period at an annual rate of more than £1.5m. The apprenticeship levy only applies to businesses with a UK payroll of at least £3 million. Gender pay reporting only applies to companies with 250 or more employees. If the size test is based on headcount, would that include contractors or not? Or could the test be based on other matters such as ‘is the business regulated’, the assumption being that regulated businesses are used to dealing with legal change.
Could we have a twin track system where different businesses might have different requirements? Well, we already do. The current rules require that organisations that are public authorities as defined by the Freedom of Information Act 2000 are already required to operate IR35 differently to those that are not.