IR35: What you really need to know

IR35, formally known as off-payroll working rules, is a tool deployed by HM Revenue & Customs to check if a contractor is genuine.

In some cases, contractors are disguised as employees for tax purposes, but the IR35 changes are set to ensure everyone pays their fair share.

Independent contractors, many of whom work through personal services companies, will now have to satisfy specific criteria to continue operating in this way and, if not, will have to go on to the payroll.

This has been the case for government workers since 2017. From today, many previously self-employed professionals and workers will have to be payrolled, and of course, pay PAYE and national insurance contributions.

The workforce will become less flexible and the economy will suffer in the long term.

The background to all of this has been the Treasury and HMRC's joint efforts to tackle so-called 'disguised employment', where many of these contractors were deemed to be carrying out activities just like any other employee.

Still, because of their contractor status, they could pay themselves via dividends, reduce the amount of tax paid, and avoid employer and employee national insurance contributions.

In its simplest form, the test that needs to be applied: is the individual in question being managed and directed in what they do and using the client's equipment to do their work?

If the answer is yes, they are deemed to be inside IR35 and are required to be on a payroll, paying PAYE. This has several resultant effects:

1. The tax liability shifts in the supply chain and end clients will no longer engage with contractors who employ themselves through limited companies as freely as they would before.

2. Large numbers of contractors will become employees, which poses several constraints on the country's flexible workforce.

3. Ultimately the cost of this being covered by contractors and intermediaries/ consultancies.

Contractors are now unable to capitalise on the benefits they had running their own limited company, and intermediaries /consulting companies will significantly increase their risks and costs to hire.

At some point in the future this cost will undoubtedly shift to the end clients.

Those in favour of the changes argue that most contractors were in masked employment and employees and employers were not paying the correct tax category.

But the fact of the matter is that the UK had a thriving, self-employed sector and these changes will also have the effect of making companies and employers much more cautious in taking on extra staff.

In a contractor world, they could be taken on and released much more quickly, enabling companies to invest and manage change easily.

Projects could be resourced as required and staff reduced easily when projects are completed or no longer needed. Even when a contractor could legitimately be deemed outside of IR35, companies will become increasingly risk-averse.

If they get the classification wrong, they will become liable for any unpaid tax and avoid engaging independent contractors.

Ultimately, the workforce will become less flexible and the economy will suffer in the long term.

Mike Hampson, founder and chief executive of Bishopsgate Financial