Changes to the controversial IR35 ‘off-payroll’ tax rules are to finally go ahead in April after being delayed for a year due to the COVID-19 crisis.
These rules, originally brought in by HMRC in 1999, are designed to crack down on a tax loophole that allowed ‘deemed employees’ – i.e. freelance contractors working for a company in such a way that they were employees in all but name – to pay less income tax and avoid National Insurance contributions.
This same loophole also allowed employers to benefit from the services of an employee, but avoid the responsibilities of an employer – i.e. the payment of National Insurance and pension contributions, as well as other employee benefits such as sick pay.
Who is affected by IR35?
All self-employed contractors working through an intermediary, such as a limited company or personal services company, could potentially be impacted by IR35 rules. The issue now is that deciding whether or not a contractor falls within IR35 will be the employer’s responsibility, whereas previously it fell to the contractor. In 2017, this change was brought in for the public sector, and from April it will apply to the private sector, too. This means that all businesses will have to assess contractors working for them and declare their IR35 status to HMRC – with hefty sanctions if they get it wrong.
So, why the controversy?
The main issue is, in a word, responsibility. With businesses now responsible for IR35 decisions and facing harsh sanctions for non-compliance – whether accidental or otherwise – many have imposed a blanket ban on using contractors as a way of avoiding the problem altogether. And, with the economic impact of the pandemic bringing many businesses to the brink of collapse, it is even more unlikely that financially struggling businesses will want to take the risk.
Survey reveals businesses are significantly underprepared
According to a survey by IR35 advisers IR35 Shield, the majority (52%) of in-work contractors have not yet been assessed for IR35, despite the imminent nature of the changes. Worryingly, and as alluded to earlier in this article, almost a quarter (23%) of firms are bypassing the need to do checks at all by placing a blanket ban on limited company contractors who could fall within IR35.
Meanwhile, 65% of contractors say they will now avoid roles that potentially fall within the scope of the new rules, and 57% of businesses say their limited company contractors are likely to leave once the changes take place. Essentially, the survey shows that both businesses and contractors are avoiding the issue, rather than preparing for it.
There’s still time
The changes may be just weeks away, but these five simple actions could help you get your business on the right track to meet the challenges of the new regime, whilst still retaining those skilled contractors who do excellent work for your business.
- Identify: who on your workforce might fall within the scope of IR35?
- Assess: use HMRC’s Check Employment Status for Tax (CEST) tool, or a similar assessment tool, to assess their status.
- Consider: if your assessment places a contractor within IR35, there will be extra costs to consider, such as pension and National Insurance contributions.
- Review: you may need to review your existing contracts and add clauses that make it clear whether or not IR35 should apply. For example, clearly stating that the contractor has been hired for a specific project, or that the employer has the right to substitute the contractor for another, will help to mark a contractor as self-employed and therefore outside of IR35.
- Consult: our Employment Law experts are well versed in the changes due to come into effect in April, and are on hand to help your business get prepared for what’s ahead.