Post sponsored by Purple Lime
If you have any friends, associates or even business contacts who are contract workers, ask them what the worst parts of their job are. In amongst all of the industry-specific tasks and a few odd annoying jobs, you can bet that somewhere in the ‘worst bits’ list will be the phrase ‘IR35 Legislation’. In fact, IR35 has been the bane of many contractor lives for the last 20 years, and it certainly one of the least popular pieces of legislation ever aimed at one sector of workers – and for many reasons. But what exactly is IR35, what does it mean for your business, and how is it changing almost 20 years on?
What is IR35?
IR35 legislation is a way of eliminating the avoidance of PAYE tax and National Insurance contributions amongst contractors, through the use of intermediary companies (like personal service companies made up of freelancers and contractors). Due to the pandemic, its introduction has been postponed until April 2021. IR35 determines whether contractors working in a limited company could, for any reason, be considered to be employees of a particular client rather than freelancers or contractors. It is being introduced because HMRC believed that there were circumstances across the country in which contractors were providing their professional services to a single client by means of a limited company or partnership in order to avoid paying normal PAYE tax and NIC’s. Instead, they would be saving themselves and the company they were working for a great deal of money by opting for the NIC’s dividend and corporation tax of limited companies, which would be much lower. However, IR35 legislation is so broad in scope, with such open terms of reference for determining status that many genuine contractors often end up getting caught out by it and having to pay more tax and penalties on their income as a result.
How Does It Impact Your Business?
IR35 generally only applies to freelancers and business owners who contract out, and who work primarily for one business. But just because the group it relates to is small, it is still severe. For starters, there is a huge difference in the take-home pay of contractors inside and outside the IR35 band. Most studies carried out since the legislation was first introduced in 2000 suggest that a typical contractor on £300 a day would be £10,000 per year worse off if they were caught by IR35 rules and forced to pay tax. The vast majority of this tax gap is accounted for by the taxation of dividends, which do not attract National Insurance Contributions like salaries do.
The Recent Updates
In April next year, the rules around IR35 will change for the first time in 20 years. At the moment, the obligation to determine worker status falls onto the contractor themselves, and it is their responsibility to make sure that they are following IR35 properly. However, these new changes will put the responsibility for determining whether the off-payroll working rules will apply or not squarely onto the shoulders of the business receiving the service. In other words – if you hire contractors, you will soon have a new job to do.
The good news is, HMRC have issued some guidance to help with this, including some things businesses can do to make the process easier and prepare for the changes:
- “Look at your current workforce (including those engaged through agencies and other intermediaries) to identify those individuals who are supplying their services through personal service companies.
- Determine if the off-payroll rules (IR35) apply for any contracts that will extend beyond April 2021. You can use HMRC’s Check Employment Status for Tax service to do this.
- Start talking to your contractors about whether the off-payroll rules apply to their role.
- Put processes in place to determine if the off-payroll rules apply to future engagements. These might include who in your organisation should make a determination and how payments will be made to contractors within the off-payroll rules.”
As you can imagine, these changes not only make a big difference to the overall income of contractors, but to how businesses approach working with contractors moving forward. Many businesses who have not had to consider the status of their contractors will now be thrown into unknown waters, with a lot to learn along the way. If your business works with contractors and needs some guidance on the IR35 rules, we would be happy to help. Email email@example.com, or call us on 01249 691360.
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