NEC ECC: Secondary Option X2: Changes in the Law - Will the changes to IR35 rule be a CE?

HMRC is changing the IR35 tax rules relating to self-employed people from April 2020. My question is will this trigger a compensation event if secondary Option X2 is included in your contract and if so what would Contractors, Subcontractors and Consultants be able to recover under the ECC, ECS, PSC or TSC?

The simple answer is that the proposals have to be a change in the law for them to be enforced.

Originally presented in the Social Security Contributions (Intermediaries) Legislation 2000, the provisions known as ‘IR35’ (a short form reference to the Inland Revenue briefing note 35 published in March 1999), were subsequently included in Chapter 8 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003).

The changes to the ‘public sector’ in April 2017, were included at Schedule 1 of the Finance Act 2017, as changes to the ITEPA 2003.

Following the imminent announcement in the forthcoming budget on 11 March 2020, the Finance Bill 2020 is due to be published on 25 March 2020, which will include corresponding amendments to the ITEPA 2003 to apply ‘IR35’ to the ‘private sector’.

If 06 April 2020 is after the contract date then it is a compensation event. It is noted that under clause 61.3 (ECC) the obligation to notify a CE probably commenced some time ago, (the implementation was postponed by a year from last April), although the ‘time bar’ period cannot effectively commence until the appropriate legislation comes into force, which would be when the event actually happens.

The consequent effect is not easy to assess. Many organisations have already implemented measures to counter the effects of the impending changes. Would this be taken into account as an affect of the actual Defined Cost of the work done by the dividing date?

Perhaps a starting point would be a ‘before’ and ‘after’ scenario with regard to People cost, although an issue to consider is the ‘open market’ or ‘competitively tendered’ issues at clause 52.1 (ECC), so by simply adjusting the rates of existing People who would now be ‘inside’ IR35 may not comply with this requirement.

The recent Government’s review has acknowledged that many companies are ill prepared for the changes (even though they have been expected for the past 3 years), so there may have to be some discussion on the effects between the Parties to reasonably determine a CE assessment.