IR35: Understanding the background
If you’re a business who hires contractors or are self-employed, you’ll no doubt have heard about IR35. Introduced in 1999, it refers to tax avoidance legislation, and was implemented in order to prevent workers from using an intermediary to pay less tax. In this instance, a contractor is solely responsible for their own tax compliance, including for work conducted in the private sector. Some individuals will request contracts that are deemed “IR35 friendly”, so as to gain the benefits that are made available to limited company contractors.
HMRC however, has perceived this area to be particularly vulnerable to tax avoidance, going so far as to update IR35 legislation in April 2017 to encompass recruitment companies who may provide workers to public authorities. Additionally, these rules (Chapter 10 “IR35”) are to be extended in April 2020 to also encompass the private sector (although this will exclude small businesses). The definition for small business has not yet been released but is likely to fall in line with the current reference applied by HMRC
The rules for the public sector state, that the responsibility for tax compliance lies with the agencies and businesses supplying such workers. This means that they will be liable for the newly outlined contractor taxes whenever IR35 tests have been satisfied. In such instances, net must be paid to the PSC, with the payee being required to account for PAYE tax and NI amounts to HMRC, as if the worker was an employee. Rates will no doubt be impacted by this, so many hirers and recruitment businesses have an active interest in this key area.
Although this new move seems set, the government will firstly hold a consultation in 2019 to reaffirm the rules which will apply. As such, forward thinking agencies and businesses that are considering longer term engagements or projects, may want to contemplate the options available in order to assure the terms of contractor use.
Pendragon Consultancy comment
The new rules will certainly cause major disruption to the supply chain and it will increase the costs to hirers of between 15-20% for those looking to retain the skills they currently have. There are wider costs for the hirer to be taken into consideration which include IR35 assessment processes, contract reviews by external legal advisors and accountants, changes to your HR policies as this type of engagement should now sit within HR if it currently doesn’t, and not just with the hiring department manager due to the level of risk and penalties, and development work to current payroll or technology platforms that you use to engage your contingent workforce to accommodate the changes.
If you are an Agency or End User who may be caught by the IR35 changes soon to be introduced into the Private Sector in April 2020, you should seek advice now to understand what you need to do now to protect your business and reduce your risk.
We can assist, please contact us on 01992 267 067 or firstname.lastname@example.org for more information and to book a free consultation with one of our expert advisors.