IR35 change is coming in April 2020 – are you ready?
IR35 is a complicated piece of UK legislation that attempts to close any loopholes in the tax system where workers could pay less tax by using a limited company structure.
Since 2000, contractors have self-assessed their IR35 status and National Insurance Contributions. However, this arrangement is widely regarded to be ineffectual with HMRC estimating that the cost of non-compliance could escalate to £1.3bn by 2024 in the private sector unless a change is made.
So, in April 2020, the rules governing the IR35 are going to be modified. From that time, the entity paying the contractor will be responsible for determining their IR35 status.
These changes will have repercussions for both the contractor and the company paying the contractor, including IT contract recruitment agencies. For example, research reveals 65% of UK contractors believe their income will decrease following the changes.
However, if you hire contractors, the impact on your business could be significant. If you get things wrong, you could be liable to pay charges amounting to one-and-a-half times the total amount each contractor is paid.
So, what do you need to do to prepare for these changes?
Inside the IR35 reform
The UK Government is planning to introduce the IR35 changes to the private sector in April 2020. If the IR35 does apply, your contractors may have to pay tax like an employee.
Inside or outside?
Whether you’re affected by the changes depends on whether your contractors work inside or outside of the IR35.
If they are outside the legislation, then you are not affected by the changes. However, we recommend you seek professional advice to ensure your contractors really do belong outside the IR35.
If they are inside the legislation, then you will be affected by the changes. These changes could also affect companies outside of the UK if, for example, you hire contractors that are tax-registered in the country.
When you are investigating whether a contractor is inside or outside the IR35, you will need to take the following factors into account:
- How much control do they have over their place of work and hours, etc?
- Do you provide their equipment?
- Do they receive any employee benefits?
- Could you substitute them for another qualified person?
However, such IR35 assessments are a minefield. We would always recommend you seek professional advice when determining a contractor’s IR35 status.
Are there any exceptions?
Yes. Not all businesses will be affected by the change, even if their contractors are inside the IR35. At the time of writing, the new rules may not apply to small businesses that have:
- Turnover of £10.2 million or less,
- A balance sheet total of £5.1 million or less
- 50 employees or fewer.
Also, if you work with any IT contract recruitment agencies, bear in mind that they may be responsible for the IR35-related tasks.
However, there is much opposition to these changes and, as such, the rules may change. So, make sure you seek up-to-date and professional advice.
What should you do to prepare?
Whatever your circumstances are, we would recommend that you take the following steps to prepare for the IR35 changes:
- Start by seeking IR35 specialist advice.
- With a general election looming, remember to keep up to speed with any developments in IR35 legislation.
- Assess your current workforce.
- Keep up-to-date records.
The changes to IR35 could have major repercussions for your business. If you would like some more guidance on IR35, or to discuss a variety of flexible resourcing options we can offer, please get in touch.