HMRC introduced the controversial IR35 reforms in the public sector in April 2017, and now is considering bringing them to the private sector– in fact, HMRC described this as its “lead option” for tackling non-compliance. So what could this mean for you?
What is IR35?
IR35 legislation began in 2000. It essentially states that when a contractor provides their services via a personal service company ("PSC"), there are tests in place to determine whether or not the contractor would be deemed to be an employee, were it not for the existence of the PSC.
Inside? If the contractor would be deemed to be an employee but for the PSC, then the PSC must tax its income in a manner similar to employment income. A genuinely independent contractor is likely to be considered 'outside IR35.'
So what are the reforms?
Traditionally, contractors working via their limited companies have been responsible for determining their own employment status.
But the IR35 reforms already introduced in the public sector have shifted the responsibility from the contractor to the client or hirer. If the client or hirer gets that decision wrong, the liability for any missing tax sits with them.
Who does it affect?
Currently it affects only the public sector. The proposed change is to make this applicable across all industries and sectors for any temporary or contract workers.
How will it affect …
If your engagement is inside the scope of IR35, then your agency or client will be responsible for paying you net of PAYE tax regardless of whether you operate through a limited company.
If you have a large population of contractors in your business, you may encounter unrest and uncertainty around the turn of the tax year as people establish whether their engagement is classified as being inside or outside of the scope of the new legislation.
With the shift of responsibility from the contractor to the client or hirer, you will need to make a judgement call on where your contractors sit in relation to IR35.
What steps businesses can be taking now to prepare:
•You will need to determine whether your contractor's status is within or outside of IR35, so it would be good to familiarise yourself now and start making these assessments ahead of time.
•HMRC have an online tool to help determine whether the contractor is within or outside IR35.
We hosted a breakfast round-table event for private sector hiring managers, sharing insight around the possible implications of IR35 for their business, and provided an open forum to discuss hiring strategies should the legislation move forwards.
If you would like to hear more about this event or attend future events, please get in touch at firstname.lastname@example.org.
For more information visit our IR35 hub.