IR35 changes: what contractors and employers need to know
As of April 2020, private sector businesses will be subject to reformed IR35 tax legislation, which since 2017 has only applied to the public sector. This could have a telling impact not only on freelance software developers and other IT contractors who provide outsourced support to companies across East Anglia, but equally the companies who regularly use contractors.
Yet recent research from freelancer platform YunoJuno has revealed that over two-thirds (67%) of freelancers in the UK are unaware of the forthcoming changes, while 42% of business owners are not aware of the fines they could face for non-compliance. Of greater concern to contractors is the fact that 24% of businesses said they would put projects on hold as a result of the changes, with 40% admitting they would have a moderate to severe effect on business.
If you’re one of the contractors or private sector employers that aren’t yet up to speed with the impending reforms to IR35, here’s a simple guide to the rules and the changes, so you can get yourself prepared ahead of April 2020.
What is IR35?
The tax position of contractors in the UK has long been a topic of contention – and one that the government sought to address back in 2000 with the introduction of legislation known as IR35.
The legislation is intended to establish whether contract workers are genuinely working as contractors, as opposed to ‘disguised employees’, who broadly carry out the same work as an employee, but do so via their own limited companies for tax efficiency purposes. Equally, some companies are known to use contractors in this way to avoid having to pay employer’s National Insurance contributions or providing employment benefits.
IR35 is designed to combat these sorts of practices – ensuring that contractors working via limited companies, but deemed to be doing the same work as an employee, pay more or less the same amount of tax. The decision on whether a contractor falls within IR35 rules depends on actual working practices, rather than the contract signed by the contractor and employer.
What is changing next year?
When IR35 was first introduced, it was a contractor’s responsibility to declare whether or not they fall under IR35 employment status. However, in 2017, there was a significant rule change for the public sector, with the onus for proving “self-employed” status shifting from contractors to the hirer.
To avoid being fined for incorrectly classing an IR35 contractor as an ‘outsider’, a number of high-profile public sector bodies, including the NHS, HMRC and MOD, have stopped using contractors who operate through their own limited companies.
Any public sector contractor found to be ‘inside’ IR35 will be taxed and pay National Insurance as employees, but without receiving any employment benefits such as sick pay or enrolment into a pension scheme. HMRC can go back as far as six years to determine whether any previous work carried out by a contractor falls under IR35 rules, and request payment of additional penalties and interest accordingly.
From next year, these changes will be applied to the private sector. This means any medium-sized or large private sector employer in the East of England who uses contractors will be responsible for assessing the IR35 status of their contractors – and face the threat of hefty fines for incorrect identification.
What about small businesses?
When the government announced the private sector extension of IR35 rules in October 2018, the Budget documentation outlined that small businesses would be exempt from the changes, to “minimise the administrative burden”.
This means the current rules – whereby contractors are responsible for declaring IR35 status – will continue to apply to companies defined as “small” by the Companies Act 2006. As a reminder, a company is deemed to be “small” if during a 12-month period, its meets two or more of the following criteria:
– Turnover doesn’t exceed £10.2 million
– Balance sheet total doesn’t exceed £5.1 million
– No more than 50 employees
If your company doesn't meet two or more or these criteria, it means you’ll be subject to the IR35 reforms when they come into force next April.
How to prepare for IR35 changes
If you currently hire contractors to support your IT, web or software development functions, now is the time to start considering how the upcoming changes could impact your business. To help you establish whether your contractors fall under IR35 legislation, make sure you take the HMRC IR35 test , which will ask you a series of questions about your current work practices.
It’s also worth taking this test if you’re a software developer or an IT professional looking into the possibility of contract work for small businesses – or indeed larger businesses if you are planning to commence prior to April 2020. Once the changes kick in next year, it might be a good idea to consider whether you want to carry on providing work for a single client, or how you could offset the cost of higher tax, in the event that you are deemed to have IR35 status.
Of the freelancers surveyed by YunoJojo, 26% said the upcoming changes would definitely impact the contracts they accept next year, with 25% saying they would reconsider working for a sole client. A further 18% said they would increase their fees to account for additional taxes.
With this in mind, both contractors and private sector firms in East Anglia should be planning for the IR35 changes now to avoid any nasty surprises when April 2020 rolls around.
Make sure you keep an eye on the Bristow Holland Blog for all the latest updates on IT recruitment and contracting in the East of England.