This brochure sets out the likely changes, the options open to engagers, how they should plan for 2020 and the help EY can provide

1. Reform of
IR35 in the
private sector

2. Reform of IR35 in the private sector1
Background
►► The off-payroll working rules (commonly known as ‘IR35’) have been around since
2000. However planned changes could soon mean that extra costs and risk are
transferred to the end engager of an individual providing their services through
their own limited company.
►► Currently, anyone working in the private sector through a Personal Service
Company (PSC) has to account for PAYE/NIC as a deemed employee if the way
in which they work would have been an employment had they been hired directly
rather than via a PSC.
►► From April 2017, new off-payroll working rules were introduced in the public sector
which transferred the responsibility to account for PAYE/NIC from the individual to
the engager (or fee payer if someone else paid the contractor). Similar reforms will
be introduced for all private sector engagements on 6 April 2020.
Typical arrangements in the private sector
New rules
Should PAYE be applied
by the payer of the fees
(assuming roll out of
public sector rules)?
Old rules
Should PAYE be applied
by the contractor?
Supply of
services
Consideration
for services
Managed service
provider
Personal Services
Company (PSC)
Contractor
The engager

3. Reform of IR35 in the private sector 2
What did Budget 2018
announce?
1. The IR35 rules will be amended for all medium or large private sector businesses
from 6 April 2020.
2. Small private sector businesses will continue with the existing rules. The
expectation is that the definition of a small company will follow that found in
Companies Act 2006.
3. HMRC will issue a further consultation document over the next few months to
consider the technical operation of these proposals.
4. The responses to this consultation will inform the legislation in Finance Bill 2019,
expected summer 2019.
Private sector
businesses should
start to plan now for
these changes.

4. Reform of IR35 in the private sector
Why is this an issue?
HMRC ‘believes’ that 1/3 of all PSCs should
operate IR35. Currently, it is understood
that only 3% do.
HMRC estimates that the tax loss in the
private sector will be £1.3bn p.a.
3
FAQs
Question EY’s view Implications
Are the changes definitely
happening?
If so, when?
Yes, April 2020. We do not expect the
forthcoming consultation to impact the
proposals significantly.
Businesses need to plan early and
understand how any changes could
affect them.
Will there be a soft landing? HMRC may take a more relaxed approach
if employers are taking reasonable steps
to comply.
Employers should expect HMRC scrutiny
to be focussed on those organisations not
appearing to comply and/or operating in
high risk sectors.
Who will be in scope,
just ‘one man’ limited
companies or will
consultants and Statements
of Work (SOWs) be in
scope?
Any worker supplying their services
though a limited company could
potentially be caught. Businesses
contracting to provide fixed deliverables
for fixed fees (e.g., SOWs), may be
outside of scope but we expect this issue
to be complex and not without risk.
Simply calling a contract a supply of
services/SOW does not automatically
mean that IR35 does not apply. Reality
will trump what the contract might say.
What are the key tests and
how do they fit within our
culture and regulatory
framework?
The IR35 tests haven’t changed. The key
ones are control, personal service and
mutuality of obligation.
You should consider not only your
working terms and conditions but the
wider regulatory framework covering
your sector.

5. 4Reform of IR35 in the private sector
Question EY’s view Implications
What can we learn from the
public sector changes?
Decisions were often rushed as the
changes were implemented quickly.
Over time, many of these decisions have
been amended or even reversed.
You may only get one chance to make
the right decisions. Early planning and
consultation is highly recommended, with
tax, reward and operational policies being
decided before any ‘fix’ is applied.
How frequently should
I undertake IR35
assessments?
This will change for each engager but,
typically, this is likely to be every six
months unless the engagement is clearly
outside of IR35.
You should risk assess your contractor
base and set rules around the assessment
process and cycle as well as how these fit
into any internal audit processes, annual
risk sign offs etc.
How will I cope with the
need to undertake IR35
assessments?
Ideally, assessments will need to be
undertaken for each contractor, repeated
regularly including each time a new
contract is entered into.
Legally you may need to undertake
individual assessments but, if numbers
are too high, this may be impractical.
You will need to agree a clear policy to
support the categorisation of contractors
and blanket assessments of those
categorisations.
How do I ensure that
what I do meets HMRC’s
expectations?
This will come from a mixture of clear
policies, a good understanding of the
rules by all necessary staff and regular
checks to ensure that the policies are
being followed.
Early dialogue with HMRC will help. Allow
time for HMRC’s input and be prepared to
make changes if required.
Is HMRC’s CEST tool fit for
purpose?
The tool is designed to be helpful in
deciding status but does not apply to
all sectors and can provide vague or
incorrect answers, particularly if not
used correctly.
Some businesses are using manual
checks, external reviews and even
designing their own version of CEST to
allow them to apply their own weightings
rather than HMRC’s.
What if a contractor
disagrees with my decision?
Leaving aside the obvious disruption
any disagreement could cause to your
business, the only formal appeals process
open to the contractor is to file their
Self Assessment tax return on the basis
that IR35 doesn’t apply and claim any
refund due.
Given the scrutiny that HMRC has already
said that it will apply to such claims, it
is most likely that the contractor will
attempt to persuade you to change your
decision rather than take on HMRC.

6. 5 Reform of IR35 in the private sector
When the reforms happen,
what choices do I have?
Your choices will depend on whether or not IR35 applies.
No IR35 — This may or may not require changes to the ways of
working between Engager and the contractor.
Option one — Engager bears the costs of Employer NI only.
Option two — Contractor bears the cost of employer NI
(and PAYE and NI) by way of reduced pay rates.
Option three — Contractor becomes temporary employee
where Engager bears the costs of employee benefits and
Employer NI.
Option four — Engager keeps the contractor whole so no impact
for contractor but significant cost increase for the engager.
Proposed reform
Engager decides if PAYE is due and has four economic options if contractor is caught by IR35
Contractor Gross Pay
Engager
Outside IR35
No changes to working
arrangements required
Option
one
Option
two
Option
three
Option four
Outside of IR35 after
changes made to
working arrangements
VAT
Employer NI
PAYE and
Employee NI
Net Income
Employer NI
PAYE and
Employee NI
Net Income
VAT
PAYE and
Employee NI
Net Income
Employee Benefits
Employer NI
VAT
Employer NI
PAYE and
Employee NI
Net Income
VAT
Net Income
Income and
Corporation Tax
VAT
Net Income
Income and
Corporation Tax
There is no ‘win/win’ option. Unless you can show that IR35 does not apply, each choice will drive
up cost and/or reduce contractor take home.

7. 6Reform of IR35 in the private sector
Our IR35 Cost tool can help you
understand the choices open to you
Example analysis based on 200 contractors, total spend £13mn — illustrative figures only
We can help you to model the impact of any changes for groups of workers or individually. You can then not only understand the
cost implications of any choices open to you but also plan for how best to communicate any changes and handle any disputes.

8. 7Reform of IR35 in the private sector
It’s not just tax — a case study
No of Contractors Average fees Total Contractor spend
500 £100,000 £50,000,000
Background assumptions
High Medium Low
Classified as within
IR35
0% 30% 100%
Employment Tax
Not Paid
£20,600,000 £14,500,000 0
Employer NI
Payable
0 £1,900,000 £6,300,000
Tax Risk Spectrum
Employment Status
Claims
10%
Number of claims 50
Employment Risk Spectrum
Additional
Contractor Spend
£1,900,000
Contractor
Turnover
10%
Additional
Turnover Cost1
£75,000
Policy Risk Spectrum
1
Assumes £5,000 cost of hiring new Contractor
Operating IR35 on 30% of the
contractors will increase costs
by £1.9mn. There will also be
an exposure of £14.5mn in
relation to employment tax not
paid for the remaining 70% of
contractors.
Some contractors may leave as a
result of the IR35 decisions you
take. If only 15 did so each year,
we estimate that this would cost
you at least £75,000 pa on top of
the additional NIC costs and any
disruption caused.
Contractors forced to pay tax
at employee rates may make
backdated employment status
claims. Do you know what risk
this presents for you?

9. 8Reform of IR35 in the private sector
How should you prepare for
change now?
Understand
Adapt
Implement
Review
PlanEngage
Now
When
legislation is
known
Six months
from
introduction
of new
legislation
►► Numbers involved, current costs, length of
contract, etc.
►► Objections to change
►► Current policies, standard documents, etc.
►► Current cost vs. future costs
►► Impact on the business
►► What help you need
Understand
►► Lobby and engage
with HMRC
►► Engage with
internal
stakeholders,
customers and
supply chain
Engage
►► Detailed
workstreams
►► Key dates and
deliverables
►► Communications
and timings
►► Support required
Plan
►► Once legislation is known
►► Updating plans based on
HMRC guidance when
published
►► Reacting to competitor
intelligence and feedback from
the marketplace
Adapt
►► Policies
►► Processes
►► Systems
►► Communications
►► Training & Guidance
Implement

10. Reform of IR35 in the private sector 9
How we can help
Financial risk Tax risk
Talent risk Execution
risk
Total operating
Business leaders
model
Governance
Policy
f
ram
ework
Contractors
Group
Tax
HMRC
Data qualit
y
HMRCriskprofile
TalentandHR
System
s
Le
gal
Contingentworker
supplychain
How do you balance the tax, commercial,
reputational and legal risks in a cost
effective, simple way?
►► Initial understanding and
planning
►► Cost modelling
►► Policy assessment and design
►► Stakeholder and contractor
communications
►► Programme execution and
assurance services
►► HMRC strategy
►► Link in to legal, talent and
workforce strategy
How we can help

11. John Chaplin
Executive Director
London
Tel: + 44 20 7951 4654
Email: jchaplin1@uk.ey.com
Michael Griffin
Senior Manager
Bristol
Tel: + 44 117 981 2274
Email: mgriffin1@uk.ey.com
Luke Wainwright
Manager
Manchester
Tel: + 44 161 333 2716
Email: lwainwright@uk.ey.com
Karl McLean
Assistant Tax Advisor
Newcastle
Tel: + 44 191 235 0066
Email: kmclean@uk.ey.com
Tom Fishley
Senior Tax Advisor
Edinburgh
Tel: + 44 131 777 2352
Email: tfishley@uk.ey.com
Nathan Woollery
Manager
Birmingham
Tel: + 44 121 535 2609
Email: nwoollery@uk.ey.com
Rachel Chalmers
Manager
Glasgow
Tel: + 44 141 226 9330
Email: rchalmers@uk.ey.com
Ian Thomas
Senior Manager
Reading
Tel: + 44 118 928 1453
Email: ithomas2@uk.ey.com
Penny Crowne
Senior Manager
Cambridge
Tel: + 44 1223 394 746
Email: pcrowne@uk.ey.com
For further information on the issues raised
or to discuss your employment taxes issues
more generally, please contact one of the
following or your usual EY contact.
10Reform of IR35 in the private sector

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