Controversial changes to IR35 tax legislation for contractors in the public sector were introduced in April 2017. In the Autumn Budget, the Chancellor announced that similar IR35 rules will apply to private sector freelancers from April 2020. This could pose a real administrative challenge for the many organisations that engage freelancers on a temporary basis.
In most organisations, the flow of work has peak times and quiet times but taking on extra staff to cover busy periods is not always the best solution. Using freelancers or contractors can help fill those temporary gaps in manpower or skills.
There have to be some perks to leaving the (relative) security of employment and a lower tax bill is generally seen as one of the key benefits of contracting.
Historically, contracting through a limited company suited both the needs of the engaging company whilst allowing the freelancer to maximise their tax position.
IR35 – or the Intermediaries Legislation, to give it its full name – came into force in April 2000 to tackle what HMRC saw as ‘disguised employment’, specifically relating to contractors trading through Personal Service Companies (PSCs). IR35 enables HMRC to create a ‘hypothetical contract’, by passing the PSC to ask: “What would the relationship look like if the individual doing the work was actually engaged directly by the end client? Would it be one of employment or self employment?”
If, in simplistic terms, the answer to HMRC was employment, the PSC would have to apply PAYE to its earnings from that engagement. The key issue, therefore was around determining the ‘IR35 status’ of an engagement. Responsibility for the decision and liability for the tax lay with the PSC.
This changed in April 2017 when responsibility for deciding the IR35 status of the contractor shifted to the end client engager. At this time, the changes applied in the public sector only.
The announcement in the October 2018 Budget Statement means that from April 2020, IR35 status will become an issue for all medium-sized and large organisations in the private sector.
Private sector organisations need to prepare for the changes now
The government has promised further consultation, so the final picture is not yet clear. However, based on experience of IR35 in the public sector, private sector organisations that engage temporary resource should start to plan now.
Below are key points that anyone responsible for engaging contractors in the public sector should consider:
Understand the legislation
Gaining a thorough understanding of the legislation will enable your organisation to make decisions about the IR35 status of an engagement from a position of knowledge. If asked, those engaging temporary resource will have 31 days to give reasons for their decision.
Specialist knowledge or training
Determining status requires specialist knowledge. Do you have resource available that understands how to implement the legislation correctly? Are there processes in place to review contractual terms and working practices for each engagement?
Volume of work
Reviewing IR35 status for organisations that engage large numbers of contractors will be labour-intensive. Does your organisation have the time to carry out reviews, perhaps twice each year? If some contractors choose not to renew or accept engagements because a role is deemed ‘caught by IR35’ (and they face a larger tax bill) will the business be affected?
Direct or through agencies
If your organisation engages contractors directly you are not only the decision-maker, but also the fee-payer. As such, you would be liable for any unpaid tax and NICs if the decision to pay a contractor’s company gross is found to be incorrect. If you use agencies to recruit your temporary resource, do they fully understand IR35 and their responsibilities?
If you engage contractors directly, do you have measures in place to deal with an HMRC enquiry? This is a specialist area of tax, and Tax Investigation Insurance to protect against any liability can be invaluable.
Who will be affected by the changes to IR35?
IR35 will affect any private sector firm that engages temporary resource from April 2020, causing significant administrative challenges for many. Start the planning process now so that you are ready to comply with the new regulation when it arrives, and also to ensure you can engage the right level of resource when it’s needed.
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