It has seen years of discussions and consultations and even cries from lobby groups of it being “unworkable” but finally the government has confirmed that IR35 legislation will be extended to the private sector from April 2020.
HMRC maintains that without the new legislation the country will lose £1.3bn in tax revenue by 2023/24 through tax avoidance by contractors working as ‘disguised employees’ who HMRC believe would be classes as employees if they were not using a limited company structure.
That leaves contractors, agencies and end user clients just seven months to prepare for the shift in responsibility, additional paperwork and exposure to risk the changes to the off-payroll working rules will bring, or risk facing tax bills of potentially thousands of pounds for incorrect IR35 classification.
The changes of course come some two years after significant reforms were made to IR35 legislation in the public sector, a move which also received its fair share of criticism with many public sector organisations arguing that as a direct result of the changes they are still struggling to attract and retain the best contractor talent today.
So, what are the changes?
From 6 April 2020, the legislation changes will see the responsibility of classifying a contractor’s IR35 tax status and ultimately their need to pay income tax and National Insurance (NI) change from the individual contractors to the private sector companies or recruitment agencies that hire the contractor.
All private sector companies and recruitment agencies, aside from those with fewer than 50 employees or less than £10.2m annual turnover, will be tasked with the new responsibility of assessing the employment status of any contractor they use, deducting the necessary income tax and employee NI and for paying employer NI for any contractor deemed inside IR35.
So, for contractors suddenly finding themselves within IR35 they will not only have to pay tax and NI, deducted monthly at source, leaving them 32% per month worse off or even more if they are a higher tax payer but in return they will receive none of the employment benefits or securities that come with ‘employed’ work.
There are real concerns over how time consuming and difficult it will be to determine IR35 status especially as recruitment agencies might have to rely on the opinion of their client which if determined wrong will leave the recruitment agency liable for the unpaid tax and NIC payments and not the client.
Ultimately, whoever determines the status of a contractor has to be 100% confident in their decision.
The need for accuracy has led to fears that there could be blanket ‘inside IR35’ decisions made especially after the recent
news that 98% of IR35 status assessments carried out by High Speed 2 (HS2) in 2018 deemed the contractor to be ‘inside IR35’ and Network Rail also
confirmed that they had assessed 99% of their contractors to be caught by IR35 in 2018.
So, what should we all be doing now?
The changes might be seven months away, but they will impact any long term placements that are being agreed now so immediate action is needed.
For agencies and employers Internal systems and processes and all existing and proposed new contracts need to be reviewed and if needed current contracts need to be introduced in good time.
Agencies need to be having the IR35 conversation with their contractors and clients now to identify their needs and concerns ahead of the launch and the process of reviewing the existing contractor workforce to determine the IR35 status of every contractor currently on assignment needs to start.
For contractors speak to your agency who will be able to guide you through the changes and the impacts to your personal situation.
