IR35 rules change in the private sector

On 5th March the government published a consultation on its plan to extend the public authority IR35 rules to the private sector, excluding small businesses (less than 50 employees, less than £10m turnover). This has implications for hirers and everyone in the contractor supply chain.

Responsibility for determining the tax status of contractors is to transfer from the contractor to the hirer. Tax liability passes to the ‘fee payer’, which is the business that contracts with the contractor. All income (excluding vat and expenses) paid to the contractor business must be treated as income of the individual. This means that income tax and employee and employer NICs calculated on the full contractor rate must be accounted for by the fee payer. The current 5% expenses allowance for contractors is also to be scrapped.

These rules mean that hirers should carry out an IR35 status assessment before engaging any contractor. The assessment is complex and legal. Whilst HMRC provides an online tool (CEST) to assist, it is notoriously controversial as it is most likely to identify the contractor as an employee!

The implementation will affect businesses that use contractors, and higher costs are inevitable.