Following the Government’s decision to postpone the IR35 changes from March 2020, the new rules affecting contracting law are now just around the corner.
This means that staffing agencies and end clients need to ensure that they are ready for the Easter 2021 deadline.
Why is IR35 Changing?
“Introduced in April 2000, IR35 was designed to prevent tax avoidance by contractors and the businesses hiring them, who supply a service to the end clients via a limited company or agency,” explains Emma Roberts from One Click Accountant.
“HMRC classes these workers as ‘employees’ so they need to cough up income tax and National Insurance contributions, just as if they were employed.”
“Criticised for being clumsy and a burden for small businesses, the Government is replacing IR35 with the new Off-Payroll Tax, introduced in the public sector in April 2017 and affecting the private sector from April 2021″Emma Roberts, One Click Accountant
HMRC estimated that only 10% of contractors were acting “inside IR35”, potentially costing the Treasury up to £1.3bn per year in lost tax revenue by 2023-24.
How are Contractors Affected?
“When they first heard the IR35 news, it was obvious to contractors that it made no financial sense to have a personal services company (PSC), as they would lose their notional five percent allowance,” suggests Emma.
“That meant that there’s no point having the added cost of running their own company.
“This has seen more business for larger contracting companies, while individual contractors will experience a significant loss of take-home income unless they negotiate increased rates to cover their losses.”
How are End Clients Affected?
There are two avenues open to end clients:
- Accept the changes and continue to use contractors in order to retain the top freelancer talent
- Remove the problem by employing staff directly.
“The danger for the end client is that they need to show that their new arrangements meet the requirements of reasonable care, otherwise they will need to handle the deduction of tax and National Insurance,” warns Emma.
“Many clients have started hiring workers on a self-employed basis, usually with a contracting firm sitting somewhere in the middle.”
Who is the End Client?
Labour supply chains can be complex, so determining who holds tax liability is tricky.
However, this is crucial if companies wish to avoid more paperwork and visits from the taxman.
“When an end client outsources work to a third party, then the third party becomes the end client and will be responsible to handle the Off Payroll duties,” explains Emma.
“When hiring individual consultants, the end client is deemed the decision-maker, regardless of whether the consultant has their own company.”
“Small companies (fewer than 50 employees) are exempt from making IR35 status decisions, as long as they have a turnover of no more than £10.2 million and a balance sheet total of less than £5.1 million”Emma Roberts, One Click Accountant
“Not surprisingly, many individual contractors have clubbed together to form small consultancy firms,” Emma continues. “This is allowed, but the end client needs to be aware that it will hand IR35 decisions and liability to the new firm.”
“Expect these vagaries to be tightened up by HMRC, but in the meantime end clients need to ensure their contracts are watertight and show who holds tax liability.”
Statements of Work (SOW)
“Another possible solution is to issue statements of work (SOW), which outline the work required,” suggests Emma.
“However, on their own, SOWs may not be sufficient to fall outside IR35, especially if the work involves one contractor.”
“The IR35 news was welcomed by recruitment agencies who can now offer a complete staffing solution to their clients.
“They can offer contractors to the end client, who can rest assured that all the necessary work on contracts has been handled professionally.”
Do You Need Help With IR35?
Getting your IR35 status correct is vital for both contractors and clients.
If you are concerned about what the changes mean to you and your business: