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The implications of IR35

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The Finance Bill was published earlier this month including the much anticipated legislation for the private sector off-payroll rules that we discussed in our last blog, and which are coming into force from April next year. IR35 is a new tax law being introduced to counter tax avoidance by contractors providing services to clients via a limited company, who could otherwise be considered an employee. It is estimated that almost a quarter of the UK’s workforce now works on a contingent basis as a contractor or consultant, either in the public or private sector and as such, there is plenty to think about from both the contractor and the hiring client perspective. Don’t forget, HMRC will be ready to investigate all parties in a contractual chain should they not receive the correct tax or NI contributions, so it is nothing to be taken lightly.

Contractors are understandably concerned that new, complicated legislation that could result in an HMRC investigation into a company may put off many hiring companies from using contractors, despite the recent increased uptake for contract work caused by the economic uncertainty over Brexit. Furthermore, it will no longer be up to the contractor to say whether or not they fall inside or outside of IR35 – the status determination from April 2020 will be with the engaging client. When this happened in the public sector, there were a number of cases of clients issuing blanket assessments, whether or not a contractor was genuinely self-employed, and, despite the recent legislation stating that blanket statements will not be permitted this time, contractors are reasonably nervous about a retrospective tax bill. With nine months to go before the legislation comes in, there are some practical steps contractors can take to prepare:

  • Contact your clients – make sure that they are on top of managing their own IR35 process and that they understand your situation correctly
  • Get a Confirmation of Arrangement (CoA) document in place, where your status is confirmed
  • Ensure your own documentation, equipment, and processes clearly demonstrate that you are self-employed, as you may need to prove it
  • Get a second opinion if you’re not convinced about any contract you’ve been presented with
  • Educate yourself on the official disagreement process should you wish to challenge a status ruling

On the other side of the coin, hiring clients are also apprehensive about the new legislation, particularly with recent research claiming that contractors will be prepared to walk away from projects if hiring companies are not fully ready and compliant with IR35. On top of that potential talent shortage, hiring clients will also have the onus of determining who is inside and outside of IR35 and are also ultimately liable for payments to HMRC should the contractual chain fail at any stage. With the cost and responsibilities on employers significant, it’s surprising that almost half of businesses are yet to tackle IR35 when there are steps that they can take too to prepare:

  • Review existing contractors and identify their status individually, using the online CEST service should you wish
  • Review the contracts, roles and requirements that you have historically placed on contractors, as many clauses could hint at a “disguised employee”.
  • Do the maths – consider that there might be additional payroll and NIC’s to take on board
  • Review your job advertising – you will need to clarify future contract roles with an eye on IR35

If you would like any advice on IR35, either from a contractor or hiring client point of view, please don’t hesitate to contact us.