The Last Minute Confusion Around IR35

We may be getting close to a new tax year, but a recent last-minute change caused more than just a few headaches for anyone getting bogged down in the detail of IR35.

HMRC recently announced that IR35 rules are going to apply to payments and services which are offered effective 6th April 2020. As this is the beginning of the new tax year, it makes sense, but there’s just one problem from the news; everyone in the private sector has been scrambling to get 2019/2020 invoices processed and completed in line with IR35 rules, and how might need to undo work retroactively.

Now all that hassle has been (mostly) for nothing, but the flash in the pan news highlights a broader problem for private businesses across the UK of all sizes; IR35 is confusing pretty much everyone. There are a host of unforeseen issues which go way beyond tax status determination for IR35 in private sector scenarios.

What has the “tweak” in the law done?

This last-minute change, or rather update, from HMRC, has been an attempt to eschew the begrudgement many companies have had against IR35. The main sticking point involved invoices for previous works needing to be reassessed in the new tax year i.e. if a company hired a contractor to do work in 2019/20 tax year and they provided their invoice after 6th April 2020, that company couldn’t just process it but have to show they reviewed the work and provided a reassessment as to whether that old work was now inside or outside IR35.

Why is IR35 so confusing?

Funnily enough these changes weren’t meant to be so confusing. The concept of them was simple: your contractor is either working for you, or they’re working as you. It was supposed to enable contractors and freelance employees to gain from relevant benefits, but as the picture becomes clearer, it mutated in a way HMRC couldn’t imagine.

Why aren’t people reacting to IR35 as hoped?

The change essentially creates a scenario where companies are left to determine the tax status of contractors. So, even if a contractor declared themselves as in or out of IR35, the company who hired them still have to say “yes, that is the status and we agree”.

Doing that requires more resources, which means new jobs for work that companies don’t think needs done. Instead of hiring new people and having them detangle the confusion, it’s currently much more straightforward for companies to ignore IR35 by not hiring contractors.

So what happens in the new tax year?

It will be very interesting to see how companies and contractors start to settle down when the new tax year kicks in. It should see a number of contractors begin to state their tax status out the gate to ease potential concerns or companies feeling like they have to barter for tax status.

HMRC should expect to find themselves having to investigate contractors stating they’re outside IR35. At the same time, contractors will be fighting tooth and nail to remain outside so they can avoid having to pay backdated Income Tax and National Insurance (and that excludes a potential fine). And in the midst of all this, we’ll have private companies who don’t want to have to decide where contractors lie as they don’t think it is their responsibility.

Will IR35 change?

We won’t really know the overall effects of the changes until at least a few months into the new tax year. If all the kinks are ironed out, HMRC will be gleefully happy. If it seems to be too much hassle for all parties involved, tax laws will need reassessed, and the headaches could fall on the side of the Taxman.

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