Due to changes introduced in the Autumn Budget, from autumn 2020, off-payroll working rules which have only been applicable to the public sector will be also implemented in the private sector as well. What this means, is that the end client (hiring manager) of a worker will now be in the position of determining the IR35 status rather than the worker themselves resulting in significant tax changes to a large amount of contractors in the private sector.
But what really is the IR35?
To simply put, IR35 which has been around since 2000 has the primary aim of deciding whether a non-payroll worker is a legitimate contractor or whether such person fits as an employee of a company where their services are rendered. There are various tests carried out to determine this status as well as tools such as Check Employment Status for Tax (CEST), albeit being criticized for not being the perfect yardstick for measuring IR35 status due to inadequate information.
The implementation of the IR35 into the private sector springs from the fact that some companies engage contractors who function in the same capacity as actual employees but who pay less tax as ‘disguised employees’. With the recent inclusion of the IR35 in the private sector, the liability for labelling a worker as employed or self-employed is tilted away from the individual and towards the company which they offer their services.
With this new development, the stakes are higher for companies who fall victim, as penalties tend to go in the ranks of tens and hundreds of thousands of pounds in taxes and fines. As a result, the government have offered large and medium-sized businesses to which this reformation applies an extended time for preparation, pushing implementation date from 2019 to April 2020. Although this has brought about numerous reactions with some people insinuating that the government’s plan sits out as premature and others claiming the government might want to reconsider its stance of the issue. However, it is quite obvious that the topic happens to be a big deal for all parties involved.
While the finer details are yet to be communicated to the public until further ‘consultation’, clarity will be provided prior to April 2020. It is however pertinent for both clients and companies to be well aware of what the IR35 changes bring as well as how to brace themselves for what’s coming.
For contractors, there have been great emphasis laid by the FCSA with regards joining non-compliant tax avoidance schemes as an alternative to the limited company model. Companies that use contractors inside IR35, would also have to be more cautious of the rules within which they work, understanding that the cost of making a wrong decision of whether or not a contractor is self-employed could wound up into massive dent in the company’s finances.
While we await clarity on how the new IR35 scheme would be fully implemented into the private sector, both parties involved can only but prepare by familiarizing themselves with what change the IR35 brings and how it affects them. More importantly, to avoid blanket decision and identify what steps are adequate to adjust to this new development well in advance of April 2020.