Controversial IR35 tax changes confirmed but delayed
The Spring Budget confirmed many self-employed individuals’ worst fear: controversial changes to IR35 ‘off-payroll’ tax rules were to go ahead with effect from April. However, with both employed and self-employed workers experiencing significant financial difficulties amid the coronavirus crisis, it was announced that the changes were to be suspended until April 2021. But what is IR35? And how will it affect self-employed contractors once reforms are implemented next year?
What is IR35?
IR35 was introduced by HMRC back in 1999. It aimed to clamp down on tax avoidance via ‘disguised employment’, i.e. companies hiring a self-employed contractor, working through an intermediary such as a personal service company, to perform the work of an employee. This enabled employers to avoid paying out National Insurance and pension contributions, as well as other costs like sick pay and holiday pay. It could also benefit freelancers, as contractors working through an intermediary often pay less income tax, and National Insurance contributions are optional. However, if an individual falls inside IR35 rules, they are obliged to pay the same taxes as an employee on the company’s payroll.
Well, previously it was up to contractors, and not their employers, to decide whether or not they fell inside IR35 – if they got it wrong, they could face hefty sanctions. However, from 2017, it became public sector employers’ responsibility to make this call and, from 6 April 2021, the changes will extend to the private sector as well.
Why has IR35 been so controversial?
The main problem is that, because the onus of deciding whether a contractor falls inside IR35 will rest on employers, many have been shying away from using contractors altogether for fear they will accidentally fall foul of the complicated rules – and face the resulting sanctions. For example, the UK’s big four banks have all stated they will no longer be hiring contractors, while some companies have decided to place all contractors inside IR35 whether they meet the criteria or not, to cover themselves.
Organisations that represent the self-employed workforce have therefore spoken out against IR35 reforms. For example, the CEO of the Association of Independent Professionals and the Self-Employed (IPSE) has condemned the changes as “disastrous” and argued that they will “drastically undermine” the contracting sector . It remains to be seen, however, what effect a year-long delay will have on employers’ willingness to hire contractors, and on the contracting sector in general.
Who will be affected by IR35 reforms?
On the client side, IR35 changes will only impact medium and large businesses. Companies will be unaffected if they meet at least two of the following criteria:
• They have a turnover of less than £10.2m per year
• They have balance sheet assets of less than £5.2 million
• They have less than 50 employees
It is not always as easy to determine whether a contractor falls inside IR35, but the following criteria can be useful to consider an individual’s employment status:
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• The contractor is under the employer’s direct control – i.e. they are told what work they’ll perform and when, where they work, when they start and finish, etc.
• The contractor could not use a substitute to perform the work– i.e. they are offering themselves exclusively to the employer, rather than a service to a client that could be undertaken by another contractor.
• The contractor receives a constant stream of work from the employer, rather than being hired for a specific project.
• Other criteria, such as whether the contractor uses their own or the employer’s equipment, how they are paid and their level of integration into the company, can also be used to determine IR35 status.
IR35 is a highly complex piece of legislation, so it’s hardly surprising that parties on both sides of the employment fence are concerned – but the delay means now is the perfect time to get prepared if you aren’t already. If you’re self-employed and worried about the impact of IR35 on your livelihood, or an employer concerned you may unknowingly fall foul of regulations, then get in touch. Please contact us at firstname.lastname@example.org or 0330 221 8855 and your query will be passed to our specialists.