Following the release of the long-awaited consultation on new IR35 rules for the private sector, Nigel Morris, employment tax director at MHA MacIntyre Hudson, explains why IR35 will be more difficult to apply to the private than the public sector.
The consultation shines a spotlight on the additional complexities of rolling out the IR35 changes to the private sector. It’s always been the intention to exclude small businesses from the rules, but there’s still no watertight definition of what will constitute a small business. In the public sector, where the rules already apply, the size of the organisation is irrelevant as the rules apply to all. However, in the private sector the size of the business will be a crucial factor.
A legal no-man’s land beckons for small private companies, do they need to implement IR35 rules or not? The current consultation suggests using the definition of small company from the Companies Act 2006, but this only applies to limited companies. If you’re a small unincorporated business, for example a sole-trader or a partnership, you probably need to tread very carefully and take appropriate advice before concluding you’re safe from IR35.
The consultation proposes defining whether an unincorporated business is small by the number of its employees. This is a questionable approach given a company might qualify as small only if it defines members of its workforce as off-payroll, the whole crux of the issue IR35 is trying to address.
The consultation also raises a significant question over timing. It has pledged that the legislation to introduce IR35 changes will be in a draft Summer Finance Bill, but the consultation runs to 28 May 2019. This leaves a very short window for it to be incorporated into any draft Summer Finance Bill, which would have to be published soon after the deadline to allow time to pass through parliament.
Introducing the relevant IR35 legislation after the Autumn Budget may be too late to meet the target implementation date of April 2020. In trying to introduce complicated legal changes in a relatively short space of time the government is likely to run up against its own self-imposed deadline, and a potential repeat of what happened when IR35 was introduced in the Public Sector, with only a matter of weeks of notice.