HM Revenue & Customs  

Preparing for IR35 changes

Preparing for IR35 changes

In last month’s Budget, chancellor Philip Hammond put an end to longstanding rumours and announced plans to radically change the way thousands of private sector businesses engage the estimated 900,000 limited company contractors in the UK.

From April 2020, every medium and large private sector business in the UK will become responsible for setting the tax status – or as it is more commonly known, IR35 – of any contract worker they use.

This controversial and unpopular move will also see these organisations – widely referred to as ‘engagers’ – carry the liability should HM Revenue & Customs decide it has made any incorrect assessments.

This is not an entirely new concept though – the same rules already apply to all public sector organisations following changes introduced in 2017.

The IR35 rule, also known as the off payroll working rules, are not as clear as they ought to be given the size and importance of the independent workforce.

They were introduced in 2000 by then chancellor, Gordon Brown, in an attempt to stop ‘disguised employment’ and prevent contractors working through their own limited company to avoid tax, when in reality, their working arrangement reflected employment.

From the very beginning, IR35 has been criticised for its complexity and for ignoring the difficulties when interpreting the boundaries between a genuinely self-employed contractor and an employee. 

When working outside the scope of IR35, a contractor is able to pay themselves through their limited company and, marginally, more tax-efficiently.

When sitting inside IR35, a contractor is deemed ‘employed for tax purposes’, which means they are required to pay income tax and national insurance contributions, just as an employee would.

The key tax differential, however, is the employer’s NICs, which would have been levied at the engager the contractor is working for. 

Key Points

  • From April 2020, every medium and large private sector business in the UK will become responsible for setting the IR35 status of any contract worker
  • Many contractors do not receive employment rights for the additional tax they are made to pay
  • Businesses need to prioritise accurate decisions and avoid panicked determinations

One of the problems lies in the fact that contractors, when working inside IR35, do not receive any employment rights in return for the additional tax they are made to pay. Contractors are understandably asking where the fairness is in this.

And ultimately, it is one of many factors that has led to huge discontent among independent workers, who feel targeted by HMRC and are perceived to be a soft target by the government. It is hard to ignore their case.

Justification for change

HMRC sees things differently though. By leaving contractors in charge of setting their own IR35 status, the government believes there is widespread tax avoidance. In fact, HM Treasury thinks there is £1.3bn missing each year as a direct result of individuals outwitting HMRC by operating outside IR35 when their contract amounts to employment.

The government has tried to justify IR35 reform by claiming that 90 per cent of the individuals working outside the rules are doing so non-compliantly.

But many specialists, including contractor services provider Qdos, beg to differ.

Qdos has supported contractors in more than 1,600 IR35 investigations, and ultimately only three of these were found to be inside IR35 by HMRC and/or tribunal judges.