Gorilla Accounting, a specialist accountancy firm for contractors and freelancers claim the potential pitfalls with changes under the new Finance Bill, specifically IR35, have been exaggerated. Although not as draconian as expected, the changes proposed in the draft legislation reemphasise the importance of personal service company contractors understanding their status to ensure they are correctly classified by their clients.
Under the new legislation, from April 2020, private sector clients will be responsible for assessing whether contractors are self-employed by applying the IR35 criteria. This shifts the responsibility and risk, which has hitherto been that of the contractor, onto the end client. The change in legislation excludes engagements with small companies, where contractors will continue to determine their own IR35 status.
The new legislation is designed to increase compliance and does not change the IR35 assessment criteria. It is aimed at individuals supplying their services through an intermediary to medium or large-sized organisations. The intention from HMRC is that those who are complying with the existing rules should not be affected, and the measure is targeted at individuals who do not comply with the current rules.
An updated online Check Employment Status Tool (‘CEST’) will be made available before the end of the year, although it is still unclear what changes will be made to the tool.
“The rules on who is classified as employed according to IR35 remain the same, but the responsibility and risk for making that assessment has changed,” notes Daniel Fallows, director, Gorilla Accounting. “Those who are genuinely self-employed and are currently compliant have nothing to worry about, but they will need to review their status more regularly.
“There has been concern about the viability and effectiveness of the enhanced HMRC CEST tool, and therefore it is important that contractors and freelancers seek specialist advice to ensure they are correctly classified according to the IR35 criteria,” he added. “Although HMRC will release further guidance on this new legislation, we advise that self-employed contractors or freelancers take specialist advice as soon as possible.”
Under the new rules, the responsibility and risk that is associated with mistakes in classification are passed onto the employer. The changes mirror the rules applied in the public sector, where disputes have arisen when employers have sought to avoid the risk of fines by blanket classifying all contractors as employees. For a £10,000 project, it is estimated that a mistaken classification can cost contractors over £5,000. Over the next few months HMRC will release further guidance on the new legislation. However, a proactive approach is crucial, and having contracts properly reviewed by specialists is the most reliable way to avoid any issues.
The criteria surrounding who is considered an employee for IR35 purposes is not changing; the only change is the party who determines this. Therefore, the demand for contractors and freelancers should not be affected, and the flexible workforce should remain an important part of the so-called gig economy.