J&C Associates > Blog > Recruiting & Recruitment Industry

IR35 and the Private Sector

13.09.2018

IR35 was first introduced over 18 years ago with the purpose of tackling tax avoidance amongst some of the nefarious contractors operating in the UK.

In itself, it was a good idea because whether you are a permanent employee or a professional contractor, you should pay the correct tax and you should not be allowed to abuse the tax system. And I think every fair-minded person would have to agree.

However, I think that everyone would also agree that all contractors should earn more than their permanent counterparts as they have no benefits, no holiday pay and far less job security.

As we all know, in April 2017, everything changed, at least in the public sector. HMRC clamped down on what they saw to be a chronic abuse of the regulations and contractors were then, in many cases, forced to work via umbrella companies, whether they were rightly or wrongly judged to fall inside IR35.

Each case should have been assessed on an individual basis but unfortunately some blanket decisions were made and most of these were never challenged. Some contractors will now be paying more tax than they should while others still aren’t paying enough.

The situation was further complicated as the onus of responsibility to make the final decision (on whether the contract fell inside or outside IR35) was parked at the door of the company who paid the contractor and often this was the recruitment consultancy. Sandwiched in the middle and more often than not without access to the correct information, recruiters erred on the side of caution and decided it fell inside.

Furthermore, many recruitment companies decided the risks were too great and reduced their public sector work or at the very least insisted contractors worked via umbrella companies so as to mitigate their own risk.

Worse still, IR35 definitions remain unclear and that is a major failing of the legislation. You could argue that the legislation is deliberately unclear in order to scare people into declaring more tax rather than run the risk of being caught after the event.

And if all this wasn’t enough, HMRC’s online tool is hardly punching out anything close to definitive answers for everyone!

Well at least when these scenarios end up in court you can finally see some clarity... or maybe not.

Guess what, there are contractors in the public sector who have challenged and appealed HMRC’s decisions and won, as is the case of Ian Wells who worked as an independent Business Analyst for the DWP (Department for Work and Pensions).

Or a more recent case of football referees where HMRC wanted to classify 60 referees from Professional Game Match Officials Limited as employees... and HMRC lost. And if HMRC is losing these cases because they don’t understand the legislation that they ushered in, then what chance do we stand?

Having had 18 months of uncertainty, the situation is about to get even more confusing as IR35 legislation looks set to hit the private sector.

So what do we know – let’s say you work on a public sector client site, such as HMRC, and that you manage a team of employees (the client’s not yours), but the client manages you and you use the client’s equipment... well then you are probably falling within IR35 aren’t you?

But what if you do the exact same job described above but you are supplied (as a contractor) to HMRC by a private consulting firm... well, then you fall outside IR35.

Is this correct or fair? Does it make absolute sense – ask HMRC – these are their rules. 

There are other tests of course such as mutuality of obligation and actual supervision, direction and control but the long and the short of it is, things are not about to get any easier or indeed any clearer.

Most businesses are predicting a shortage of skills and an increase in costs when IR35 hits the private sector. Uncertainty prevails with Brexit looming and we need to re-assure the working population not scare them – businesses need flexibility with regards to hiring permanent staff and they absolutely need flexibility and certainty when hiring contract professionals.

HMRC must make the laws clearer, must make the laws transparent, must remove any and all grey areas and above all must work with the working population not against it.

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