If you have any friends, associates or even business contact who are contract workers, ask them what the worst parts of their job are. In amongst all of the industry-specific tasks and a few odd annoying jobs, you can bet that somewhere in the ‘worst bits’ list will be the phrase ‘IR35 Legislation’. In fact, IR35 has been the bane of many contractor’s lives for the last 20 years, and it certainly one of the least popular pieces of legislation ever aimed at one sector of workers – and for many reasons. But what exactly is IR35, what does it mean for your business, and how is it changing almost 20 years on?
So What is IR35?
In short, IR35 legislation was introduced in April 2000 as a way of eliminating the avoidance of PAYE tax and National Insurance contributions amongst contractors, through the use of intermediary companies (like personal service companies made up of freelancers and contractors). IR35 determines whether contractors working in a limited company could for any reason be considered to be employees of a particular client rather than freelancers or contractors. It was introduced because HMRC believed that there were circumstances across the country in which contractors were providing their professional services to a single client by means of a limited company or partnership in order to avoid paying normal PAYE tax and NIC’s. Instead they would be saving themselves and the company they were working for a great deal of money by opting for the NIC’s dividend and corporation tax of limited companies, which would be much lower. However, IR35 legislation is so broad in scope, with such open terms of reference for determining status that many honest contractors often end up getting caught out by it and having to pay more tax and penalties on their income as a result.
How Does It Affect My Business?
IR35 generally only affects freelancers and business owners who contract out, and who work primarily for one business. But just because the group it effects is small, it’s still severe. For starters, there is a huge different in the take-home pay of contractors inside and outside the IR35 band. Most studies carried out since the legislation was first introduced in 2000 suggest that a typical contractor on £300 a day would be £10,000 per year worse off if they were caught by IR35 rules and forced to pay tax. The vast majority of this tax gap is accounted for by the taxation of dividends, which do not attract National Insurance Contributions like salaries do. Not to mention the fines you would get hit with on top of back taxes if you are caught.
New Changes to IR35
In April this year, there will be some changes to how IR35 works, for the first time in many years. At the moment, the obligation to determine worker status falls onto the contractor themselves, and it is their responsibility to make sure IR35 is being followed. But from April that will change, and the responsibility for determining whether the off-payroll working rules will apply will move onto the business receiving the services. In other words – if you hire contractors, you now have a new job to do. Luckily, HMRC has some guidance to help you prepare for the changes:
- “Look at your current workforce (including those engages through agencies and other intermediaries) to identify those individuals who are supplying their services through personal service companies.
- Determine if the off-payroll rules (IR35) apply for any contracts that will extend beyond April 2020. You can use HMRC’s Check Employment Status for Tax service to do this.
- Start talking to your contractors about whether the off-payroll rules apply to their role.
- Put processes in place to determine if the off-payroll rules apply to future engagements. These might include who in your organisation should make a determination and how payments will be made to contractors within the off-payroll rules.”
You can find out more about these changes and who it affects by clicking here.
As you can imagine, these changes not only make a big difference to the overall income of contractors, but to how businesses approach working with contractors moving forward. If you need help and support in staying on the right side of IR35, or understanding these new changes, we are here to help. Just get in touch to find out more.