Employment Status and Off-Payroll Workers
The IR35 consultation is now closed, so what next? The latest consultation on the extension of IR35 rules to the private sector was issued on 5 March 2019 and closed on 28 May 2019. The responses will be used to inform the draft Finance Bill legislation, expected to be published in the summer. It will be interesting to see the Government’s reaction to the consultation responses, after the consultation includes details of the additional complexities of rolling out the IR35 changes to the private sector, which will affect off-payroll workers within the construction sector.
Some of the factors that will impact the construction sector are:
Small Business Exemption
It’s always been the intention to exclude small businesses from the rules, but there is still no watertight definition of what will constitute a small business. In the public sector, where the rules already apply, the size of the organisation is irrelevant as the rules apply to all. However, in the private sector, the size of the business will be a crucial factor.
A legal no-man’s land beckons for small private companies: do they need to implement IR35 rules or not? The current consultation suggests using the definition of small company from the Companies Act 2006, but this only applies to limited companies. If you’re a small unincorporated business, for example a sole-trader or a partnership, you probably need to tread very carefully and take appropriate advice before concluding you’re safe from IR35. The consultation proposes defining whether an unincorporated business is small by including a measure of the number of its employees. This is a questionable approach given a company might qualify as small only if it defines members of its workforce as off-payroll, the issue IR35 is trying to address.
Composite or Personal Services
IR35 does not apply to contracts categorised as self-employed. In the public sector, a move to contracts for the supply of composite services has helped manage the impact for the construction sector. However, the suppliers of those composite services will tend to be private sector businesses, who will from April 2020, need to consider how IR35 impacts them and their engagement of workers. If the burden of operating IR35 leads to increased costs in respect of employers National Insurance Contributions (NIC), which is currently 13.8% and the application of the Apprenticeship Levy, the impact on contracts, margins and costings could be significant.
Supply of Information
The government wants to ensure that all parties in the labour supply chain have sufficient information in order to comply with their obligations, proposing that the determination and the reason for the determination be cascaded to all parties in the supply chain. They therefore consider it necessary to legislate to ensure this happens, whilst at the same time suggesting that a client-led process is used to deal with any challenges to the determination. The government suggests that such an approach, where the individual can raise a concern with the client that issued it, will lead to the client taking reasonable care when reaching its final view on the status determination. This remains to be seen!
The consultation also raises a significant question over timing. It has pledged that the legislation to introduce IR35 changes will be in a draft Summer Finance Bill, but with the consultation having run to 28 May 2019, this leaves a very short window for it to be incorporated into any draft Summer Finance Bill, which would have to be published soon to allow time to pass through parliament. Introducing the relevant IR35 legislation after the Autumn Budget may be too late to meet the target implementation date of April 2020. In trying to introduce complicated legal changes in a relatively short space of time, the government is likely to run up against its own self-imposed deadline, and a potential repeat of what happened when IR35 was introduced in the Public Sector, with only a matter of weeks of notice.
If you would like to discuss IR35 with us in more detail or if you would like to speak with a member of our team, please contact Hannah Farmborough or call on 0207 429 4147 to be put in contact with your local representative.
This article featured in issue 13 of our construction and real estate newsletter series. Read the full newsletter here: Real Estate Matters – Issue 13