If you are a contractor – or hire contractors – off the payroll, it is essential that you understand HMRC’s IR35 tax legislation. The UK government is planning to arrange a consultation of IR35 non-compliance in the next year, and this could mean problems for many private sector businesses of all flavours. But what is IR35 and what will any potential changes mean? Let’s take a closer look at everything you need to know – read on to find out more!
What is IR35?
IR35 is HMRC’s legislation that deals with the contract status of contractors. Introduced in 2000, IR35 allowed contractors working via their own limited companies to determine their own status – whether they can work as a self-employed contractor or if they should be on the company’s payroll books. The legislation is supposed to weed out contractors who are, in fact, ‘disguised employees’ – people that work as if they are employed by a business, but don’t have to pay Income Tax or NICs as if they were employed on PAYE.
IR35: Changes to the Public Sector
The government have introduced new IR35 rules to the public sector, which have been in place since April 2017. Whereas before, contractors were responsible for determining their employment status, now, it’s the client or hirer who must decide whether a contractor is self-employed or should instead be on the payroll. As a rule, this is good for the contractor, as they are no longer liable for any missing tax should there be a breach of IR35 rules. Instead, the public sector client or hirer is responsible – and this change of policy could be rolled out to the private sector in the next year.
What was the impact?
It’s fair to say that the introduction of new off-payroll rules has been controversial. The government’s idea is that they want to level the playing field for people that contract and those that are on PAYE, with the former generally paying less tax and NICs. There are advantages for the hiring organizations, too, of course, as they don’t have to make any NICs contributions, and only have to pay for work done, rather than take on full-time or part-time on the books permanently.
There have been major issues, however. According to tax experts, there is still a lot of non-compliance within the public sector, and tax avoidance schemes are being promoted to contractors to encourage them to get around the new legislation. There are flaws in the online testing tools, too, meaning some people – contractors and hirers alike – are still unsure of their position. The new additions to IR35 legislation are also causing public sector bodies to be a lot more risk-averse, and putting all contractors on IR35 rules, even if they shouldn’t be. And finally, for the contractors, there is a huge issue – while they might pay the relevant tax and NICS, the reality is that they do not enjoy the same rights as employees.
IR35: Coming Soon to the Private Sector?
The reform to public sector hirers and contractors was consulted on during 2015 and 2016 and was introduced in the Chancellor’s Autumn Statement of 2016. And in the Autumn Budget of 2017, it was confirmed that there would be a consultation into extending the rule changes to the private sector. It is expected that the consultation will be published soon, leaving the door open for private sector reform at some point in the future – April 2019 at the earliest.
What should Private Sector Hirers do?
IR35 rules are famous – or infamous – for being complicated. And the reality is that if the new additions to the legislation go through, things will only get worse. For any businesses looking to hire contractors, it is essential to prepare for the changes sooner rather than later. There is plenty to learn from the public sector bodies who have already implemented the changes, but some organisations may need to use the services of IR35 specialists to ensure they will be operating within the rules. Hirers should also be aware that your contractors will find this a very stressful time – you need to keep a good line of communication open with them to make the process as easy as possible for everyone involved.
What should Contractors do?
It’s fair to say that contractors will suffer from the new changes, as the responsibility for determining your own tax status will no longer be yours – it will be down to the hiring business. This means that you may struggle to find companies willing to offer you freelance contracts, and you will be forced – on some occasions – to be placed on the company’s payroll – perhaps without any of the benefits afforded to normal employees. Also, it is thought that some agencies and businesses will only accept contractors who are operating via an umbrella company or similar. Ultimately, the best thing you can do to prepare is to open up a dialogue with your clients, to make sure you have a full understanding of their intentions. You should also plan on testing your own status – using HMRC’s CEST tool or getting an IR35 contract review done for you by an experienced professional.
Make no mistake about it, if the consultation by the government ends up becoming a complete policy reform, IR35 is set to have significant impacts on hiring businesses and contractors alike. Hiring companies will need to be very careful making judgements of whether a worker is actually a contractor or someone working under ‘false employment’ and make the relevant changes. And the reality for contractors is that they could lose all of the benefits of working self-employed, as well as taking on the entire burden of the Employers National Insurance – essentially, you will be paying your employer’s NICs burden on their behalf, as well as having to meet all the other costs involved of being self-employed.
It’s vital for businesses and contractors to understand the IR35 rule changes and make their preparations now. While the new system may not come about, the truth is that it is more than likely – and the sooner you prepare for the new impacts of IR35, the better.