HMRC is pressing ahead with extending IR35 rules to the private sector from April 2020, despite several industry bodies calling for more time.

Bodies like the Association of Chartered Certified Accountants (ACCA) had called for a one-year delay to provide enough time for a full appraisal of the rules.

But the Government ignored those pleas and last week published draft legislation on tax changes affecting private-sector contractors in Finance Bill 2019/20.

Around 170,000 individuals are expected to be affected by the extension of IR35 to the private sector from 6 April 2020.

As a result, private-sector contractors could see their income decline by up to £7,500 a year from 2020/21.

What is IR35?

IR35 tackles tax avoidance by workers who supply their services to clients through a limited company and would otherwise be considered employees.

It surrounds what HMRC considers to be ‘disguised employment' and the rules, which have applied to public-sector contractors since 2017, place the onus on hiring firms - rather than contractors - to determine a contractor's tax status.

Those considered to fall within IR35 are taxed as an employee, often at the higher rate of income tax, but do not get benefits like paid annual leave or sick pay.

If an employer decides IR35 applies to the engagement, payment to the contractor's limited company is taxed as if they were an employee.

This can reduce a contractor's net income by as much as 25%, with the average limited company contractor who remained in the public sector paying thousands more in income tax and national insurance contributions.

The CEST tool

Much of IR35's controversy surrounds HMRC's check employment status for tax (CEST) tool - an online calculator that is intended to help businesses and contractors determine the employment status of their engagement.

But the Chartered Institute of Taxation (CIOT) said the CEST tool needs urgent improvement before April 2020 as it does not include all the necessary criteria to reach an accurate decision on a contractor's tax status.

Colin Ben-Nathan, chair of the employment taxes sub-committee at the CIOT, said: "The CEST tool needs to take proper account of mutuality of obligation, multiple engagements, contractual benefits, and whether someone is in business on their own account.

"This is key because otherwise the lack of confidence in the CEST tool will increase disputes between businesses and contractors."

Effects on the public sector

Public-sector employers have struggled to keep hold of the most talented contractors since April 2017, according to the Association of Independent Professionals and the Self-Employed (IPSE).

The IPSE also claimed agencies faced greater difficulty in recruiting, having to pay more to recruit or retain the most talented contractors, and spending more time and resources implementing the complex rules.

Projects have been delayed as contractors considered their options, especially with some firms placing all freelancers inside IR35 to try and protect their own liabilities.

This approach does not comply with IR35 and resulted in many contractors paying more tax as a result of being taxed as employees, without any employee benefits.

Lack of awareness

The Recruitment and Employment Confederation (REC) claimed earlier this year that most private-sector contractors are unaware of these tax changes.

The overwhelming majority (91%) of the REC's members said its clients had only some awareness of IR35 being extended to the private sector, or none at all, while 33% had no confidence in the CEST tool.

Tom Hadley, director of policy and campaigns at the REC, said: "The changes to taxation could significantly impede labour market agility at a time when UK businesses need it most."

Talk to us about any aspect of IR35.