Is your business ready for IR35?
Pubished 25th January 2021
While Brexit talks resume and COVID-19 still threatens people’s livelihoods, will businesses be ready for IR35? The new legislation is set to come in on 6th April 2021 and will inevitably cause a shake up with 1.4 million contractors (and growing) in the UK. With attention directed elsewhere, there’s understandable confusion about the subject, so let me try and cut out the jargon around IR35 and explain what changes are being made, what contractors are planning and what you can do about it.
What do the changes mean?
IR35 applies where an individual works through an ‘intermediary’, such as a personal services company, and provides their services to an end-user client. The basic premise of IR35 is simple: if the intermediary did not exist and the individual looks like an employee of the client because of the way they are working, then their assignment is deemed to be ‘inside IR35’, meaning that the individual’s pay should be subject to PAYE tax and National Insurance (NI).
IR35 has been around since April 2000 and was heavily criticised by small businesses at its inception. Recently, the Government decided to introduce some radical reform of the rules, the main change being to shift responsibility for compliance from the contractor to the organisation making use of the contractor’s services.
The changes started in the public sector in April 2017 where the organisation that makes use of a contractor’s services (the ‘hirer’) became responsible for assessing contractor’s IR35 status. If assessed as ‘inside’, the organisation that pays the contractor company has responsibility for deducting tax and NI from payments.
The Government has decided that these new rules will also apply to the private sector from 6th April 2021.
What makes an individual likely to be assessed as inside IR35 vs. outside IR35?
There are several factors that are taken into account to identify whether an individual is ‘inside’ or ‘outside’ IR35.
Right of substitution – an ‘outside’ IR35 individual can or will provide a substitute when they are unwilling or unable to work. By contrast, if an individual has an obligation to provide the services personally, they are likely to be ‘inside’.
Control – an ‘outside’ individual establishes the scope of services from the outset, picks their own working hours and does not require coaching to do their job. If the individual is subject to significant instruction from the client, they are more likely to be ‘inside’.
Financial risk – an ‘outside’ individual deals with bad debts and rectifies the work at their own cost. If the equipment, training and/or insurance is provided by the client they are more likely to be ‘inside’.
Part and parcel of the organisation – an ‘outside’ individual does not attend staff meetings, functions or events run for employees. If the individual is entitled to staff discounts and other perks and benefits, they are more likely to be ‘inside’.
There is some good news…
The Government believes that two thirds of contractors in the private sector are engaged legitimately outside of IR35. The even better news is that over the last 10 years 85% of the cases that have been taken to the tax tribunal have also been found to be outside of IR35. This data shows that ‘blanket’ decisions deeming all contractors to be inside IR35 regardless of individual circumstances, or a move towards all contractors being engaged as PAYE are not necessary.
Contractors’ current thoughts
A recent study by Qdos reveals that 93% of contractors preferred method of working is via their own limited company. Seb Maley, Qdos CEO, commented:
"While nearly all contractors want to carry on working via their personal service company when reform arrives, not all independent workers believe they will be able to. This is likely to stem from their experience in the public sector and from blanket and risk-averse decisions already made by private sector firms."
The clients who take the right approach are likely to retain key skills.
Business leaders will need to have a clear plan of action and assess each of their contractors as individual cases. In 2017, the Public Sector division of our business assisted organisations in the public sector to navigate these changes. While the industry saw contractor numbers decrease, through careful management and guidance our clients grew their numbers enabling them to sustain the resources to achieve their goals. ECOM are more than happy to help your business navigate the IR35 changes scheduled for 6th April 2021, if this sounds like something you would like to find out more about then feel free to contact me at firstname.lastname@example.org.