How Firms Can Adjust to IR35 Changes
Despite widespread opposition the Government is pressing ahead with IR35, but with a little preparation you needn’t ditch your contractors just yet.
IR35 is coming to the private sector in April and opposition is mounting. The Government has announced a review and people are literally taking to the streets. Businesses and contractors are worried and many are still hoping the Government may have change of heart and dispense with the whole idea. Unfortunately for them, that’s not going to happen any time soon, but if you plan ahead IR35 needn’t cause as many problems as people seem to think.
IR35: the resistance
IR35 was introduced to prevent the practice of disguised employment in which a person could register as self-employed in order to pay less tax. The company, meanwhile, would benefit because they would be freed from all the usual obligations they have to employees.
From April, every medium and large company in the private sector will be responsible for setting the tax status of their employees. The fines for getting it wrong are considerable which means many will err on the side of caution and class people who currently work as contractors as employees.
The new rules, then, could see thousands of people being forced to pay income tax and the higher rate of national insurance. Understandably, then, they have gone down like a bucket of cold sick with businesses and freelancers, so much so that it became an election issue. Labour initially promised to scrap it although they peddled back on it a little while both the Lib Dems and Conservatives they would review it.
In January, Chancellor Sajid Javid followed through on that promise although it’s only a review into the implementation than the policy itself. This might not go far enough to satisfy most opponents such as Andrew Bowie, West Aberdeenshire and Kincardine MP, who warned that some workers could see their pay fall by as much as 25%. He wants the Chancellor to delay the introduction until a full review has been carried out.
That’s not likely to happen. By mid-February, the review will be done and dusted. Even so, that hasn’t stopped a planned protest for February 12th, although even the organiser David Chaplin, founder of Contractor Calculator, seems uncertain about how effective it will be.
‘It will be the culmination of years of hard work from me and my team, which will be to absolutely no avail if contractors don’t step up and help themselves – it’s no good me standing there if I’m not surrounded by hundreds of contractors all demanding fair tax laws,” he told Accountancy Daily.
Full steam ahead
The Government is fully aware of how controversial these changes are and they want to be seen to be doing something, which is why they’ve ordered this review, but like it or not IR35 is here to stay and HMRC is pushing ahead with its preparations.
The reason is very simple. The Government needs money and expects IR35 to raise quite a lot of it. HMRC figures suggest continued abuse of personal service companies would have cost the taxman £1.3bn by 2023/24. When it was announced in 2018, the proposal was the single biggest revenue raiser in that year’s budget.
The best businesses can hope for is minor changes, such as the new start date announced by HMRC. Previously the changes applied to any payments made after April 6th 2020. Now, though, they apply only to services carried out after that date so companies only need to think about those contracts they plan to continue after April 6th.
This might encourage companies to simply stop using contractors once the new laws come into force, but while that might seem to be the safest and easiest option, it’s not necessarily the best. Indeed, with some simple planning there really is no need to end these contractors. You may simply have to adjust them.
Getting IR35 ready
There are relatively simple steps firms can take to get started.
The first is to conduct an audit of everyone working in the firm to identify who, if anyone, will be affected by the new rules. You should look at what functions each person serves, where they work, who controls them and how they are paid.
However, this test isn’t infallible and you may have to look at other factors such as the detail of their contracts. For example, HMRC will look at how free an employee is to pursue work outside of the duties to their current company.
They will also look at the level of control a company has over an employee. For example, if you govern things such as their hours of work, location or even their attire, they may still be classed as employees even if it looks as if they are currently self-employed through a private company.
If you want to maintain your existing relationship with that contractor after IR35, it might be a good idea to amend the contract to reduce your control and create more distance between the two parties.
At the same time, it may be unwise to take a blanket approach to IR35 and regard everyone as employed. The Government is adamant that these rules are not intended to harm people who are genuinely self-employed and that will be a key focus of this review.
If you do this, it could cause strife. IR35 will likely reduce their take home pay and make it difficult for them to continue working for you. If you have applied IR35 to someone who is genuinely self-employed they may take action against you if they feel your decision has made it impossible for them to continue working.
This is an issue which companies need to get right. IR35 is unquestionably unpopular, both among contractors and employers, but despite this review it’s not going away any time soon. However, it needn’t damage your existing relationships with contractors. You simply have to understand what type of working relationship will be flagged up by IR35 and adjust any contracts accordingly.