IR35, which was introduced in 2000, is an anti-tax avoidance rule that applies to all contractors and freelancers who do not fall under HM Revenue & Customs’ definition of being self-employed.
From April 2020, every medium and large private sector business in the UK will become responsible for setting the tax status – or IR35 – of any contract worker they use, as is already the case in the public sector.
Some 1.5 million ‘small businesses’ (assessed based on turnover, balance sheet and employee headcount) will be unaffected by the reforms, however, and will remain subject to the current rules.
Employers will need to spend the next few months assessing whether the contractors they work with fall ‘inside’ or ‘outside’ IR35 as it will affect all contractors who do not meet HMRC’s definition of ‘self-employment’. It’s a confusing area of law, but the new rules require private sector businesses to take responsibility for deciding whether a contractor is genuinely self-employed or, in the words of HMRC, a ‘disguised employee’.
Once these complex employment status tests have been conducted and businesses understand which of their contractors now fall inside IR35, they must decide their next steps in terms of how they continue working, and consider how they will communicate these options to their impacted workforce.
Approaches to tackle IR35 could be:
- Businesses could take a blanket ban approach to IR35 – similar to HSBC, which recently revealed it will cease engaging with limited company contractors to save the business from having to assess them under the April 2020 changes.
However, this may not be a practical solution for many businesses that rely on access to a flexible labour pool, so it’s important that companies understand they don’t need to lose their contractor talent to be compliant.
- Some contractors who initially appear to fail the employment status test might be able to retain their contractor status by making a few key amends to their contracts and working practices, but we would urge employers to seek professional advice before making any contractual changes.
- For some organisations, adding ‘disguised’ employees, who are ‘business critical’, to the payroll may be a solution, however there are costs associated with employment such as sick and holiday pay and other employee rights which a contractor or freelancer is not entitled to. It also makes contractor resource less flexible and removes your ability to scale up and down as projects require.
**Private sector businesses will only have to apply the changes to IR35 off-payroll legislation to contracts carried out after 6 April 2020, as the government makes a concession to give companies more time to prepare.
This in effect means the changes to IR35 will now only apply to new contracts or contracts that businesses expect to continue after the April rollout date, and will not be applied to payments made for work done before the change.**
We can help if you need help developing a strategy to ensure compliance. The rules around distinguishing between an employee and an independent contractor may be subtle, but getting it wrong and breaching IR35 rules can result in serious tax and legal consequences for your business!
Contact us on 0203 538 5311 or firstname.lastname@example.org