What is IR35 and how will it impact me?
For contractors, the announcement of changes to IR35 regulations may have raised more questions than answers. As the April 2021 deadline for the reform draws nearer, it’s important employers and contractors alike understand what the new rules are and how they may be impacted by them. Here’s what you need to know:
An overview of IR35
Anyone currently contracting should be aware of IR35, which came into effect in April 2000. The tax legislation is designed to differentiate between those workers who operate as genuine contractors and those who work as ‘disguised’ employees to avoid paying the right amount of tax. The tax benefits of contracting have long attracted people to this way of working, with a lack of clarity around the legislation leading to a surge of contractors taking advantage of the tax benefits. The ambiguity over the employment status guidelines contained in previous versions of IR35 has led to the legislation changes, which were rolled out across the public sector in 2017.
The new rules mean that instead of the contractor being able to determine their tax status, the onus is now on the business that takes on contract staff. It’s hoped that this change will close the tax avoidance loophole that many contractors have utilised, and means that companies that do not make the correct IR35 assessment risk being fined. The likely result of this is that more contractors will have tax and National Insurance contributions deducted from their pay.
What does IR35 mean for contractors?
The new rules are aimed at ‘disguised employees’ and it’s expected that the new regulations will mean fewer contractors can illegitimately work outside the rules. While this may lead to fewer tax benefits for some, the appeal of contracting will still be strong throughout the market. Contracting offers flexibility, high day rates and the ability to take time off in between contracts, as well as giving people the chance to work in different organisations and in different capacities, making new industry connections and utilising different technologies. We may see some people who were previously working in the contract space make a move to permanent employment, which may impact salaries and the value of contractors.
Ultimately, there will always be opportunities for both contractors and permanent workers within our sectors, with benefits and challenges for each. If you’re unsure about how you might be affected, we recommend speaking to an accountant to determine how you might be financially impacted by the new legislation.
What does IR35 mean for employers?
The most significant implication of new IR35 rules for companies is the classification of contractors – and the fact that businesses are now responsible for making this classification. Organisations will be liable for determining the employment tax status of contractors who work through personal service companies, although small businesses are exempt from this. For contractors who fall ‘inside’ IR35, the employer or the party who pays the contractor becomes responsible for deducing income tax and National Insurance contributions. Businesses that work with large volumes of contractors may initially find the changes to the legislation time-consuming, however it’s worth taking the time to carefully review engagements with off-payroll workers as non-compliance may be costly.
For more information, take a look at the HMRC’s consultation document to help businesses prepare for the IR35 changes.
How Quanta is making IR35 easier
We take the new IR35 rules seriously at Quanta, and as such are partnering with an external provider to ensure the next year runs smoothly for our contractors and clients. Over the coming months we’ll conduct a soft audit of our contractor base in the UK to identify risks and who will likely be inside and outside of IR35 come April 2021.
“We’re doing this sooner rather than later because we want to know the risk to contractors, clients and ourselves as a business,” says Compliance Manager Bhavna Dooman. “It’s important to us to be able to communicate to contractors what the impact of IR35 will be on them, giving them the chance to understand their new take home pay if applicable and look into working with one of our partner umbrella companies.”
Following the soft audit, we’ll run internal training for all staff to ensure everyone in the business understands IR35. This will then span out to contractors, who will receive access to documents, Q&As and webinars around the changes, as well as clients. Then comes a hard audit, by which time contractors should have a good idea of what their status will be come April 2021.
“We want everyone singing from the same hymn sheet so we’re taking every effort we can now to open up communications with contractors and clients and understand what the new positions are,” says Olivia.
Contract or permanent, we may have your perfect role
Whether you sit inside or outside IR35 or you’re looking for your next permanent position, we can help you find what you’re looking for. View our latest vacancies now, or if you’re an employer looking for top talent across life sciences, renewables and ICT, take a look at our client section.