If you are a contractor, you will hear a lot about IR35 over the coming months. Once the reserve of those working with public sector clients, the legislation is now being expanded to include contractors who provide their services to private sector clients, too. So, what will these changes mean for you?
How we got here
IR35 has been around for some time, since 2000 in fact. Its premise was a simple and well-intentioned one – to tackle tax avoidance through personal service companies (PSC). At the time, the Government explained:
"There has for some time been general concern about the hiring of individuals through their own service companies so that they can exploit the fiscal advantages offered by a corporate structure. It is possible for someone to leave work as an employee on a Friday, only to return the following Monday to do exactly the same job as an indirectly engaged ‘consultant’ paying substantially reduced tax and national insurance. The aim of the proposed changes is to ensure that people working in what is, in effect, disguised employment will, in practice, pay the same tax and national insurance as someone employed directly."
The rationale for reforming existing legislation is to stop those performing ‘employee-like’ work via an intermediary (PSC) from paying less income tax and National Insurance Contributions than they would if they were an employee. This, the Government said, would essentially eradicate what it considers to be tax avoidance and potentially generate an additional £440 million in what it deemed to have been ‘lost’ revenues.
However, by 2010, the Government conceded that revenues generated by the legislation had fallen substantially short of expectations. The change created all manner of confusion, with many public sector contractors soon finding themselves outside IR35.
This meant they were categorised as operating like a ‘business’ rather than an ‘employee’, as had previously been the case.. In 2017, the decision was then taken to extend this to include legislation into the private sector contractors too.
Reaction to changes
It is fair to say that concerns were raised when the extension to IR35 was announced, with the last two years dominated by consultations between various groups and the Government.
There were calls for a delay in the reforms, while many others lobbied for the establishment of an independent appeals process to counter what many have dubbed to be an inadequate online status checker – Check Employment Status for Tax (CEST). But although the Government has acknowledged the concerns raised, they have by large been overlooked. So, what does this mean?
Implications for IT contractors
Under the expanded regulations, the responsibility for conducting checks on whether contractors have paid the right amount of income tax and national insurance contributions will now shift from the contractor to either the end client or the agency using their services.
So, if the contractor is deemed as ‘employed’, HMRC will consider the arrangement between them and the hirer as employment, where the invoice issued and subsequently paid is treated as the salary of the contractor. As such, once VAT and allowed expenses are set aside, the net figure will be subject to PAYE and NIC deductions.
The changes are set to affect 170,000 contractors who currently operate through their own company, and as many as 60,000 clients that utilise their services which are employed via a PSC. HMRC estimates that the cost of non-compliance is set to rise to £1.3 billion by 2023, with the Government hoping to collect an estimated £3.1 billion between 2020 and 2024 as a result of these new measures.
Unsurprisingly, HMRC is determined to ensure that all businesses entering into an agreement with a contractor assess the services being requested and determine if the contract is 'inside’ or ‘outside’ IR35 . If an incorrect assessment is made, and therefore there is a tax contribution deficit, then HMRC will pursue the agency or end client for the difference.
Navigating your way through IR35 can be challenging. If you are looking for advice and guidance on how the new changes may impact you in your contractor career, get in touch with us today and we can talk you through it. We also have a dedicated hub containing frequently asked questions and information on IR35 for both clients and contractors.