Just a couple of months ago, it seemed almost certain that the much-debated changes to IR35 would come into force, and the government seemed adamant that there would be no backtracking. This was before the advent of an unprecedented pandemic, which has forced thousands of businesses around the world into financial strain and uncertainty.
The outbreak of COVID19 and subsequent repercussions on professionals across all sectors prompted the government to announce a set of measures that would alleviate the pressure on small businesses. Amongst these was the announcement that the new changes to IR35, which were meant to come into effect on 6th April, will be postponed until the start of the new tax year (opens in new tab) in 2021.
Although this was well-received by businesses right across the UK, our community of freelancers, sole traders and SMEs tells us that there is still a desire to thoroughly understand IR35 and its potential implications sooner rather than later, so here’s what you need to get the facts straight now.
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What is IR35 and what do the new regulations mean for businesses?
In short, IR35 is an anti-avoidance tax legislation designed to close a loophole in the tax system where workers could use the setup of a limited company structure in order to avoid employment taxes. Essentially, IR35 has been created to assess whether a contractor is a genuine contractor rather than a ‘disguised’ employee, for the purposes of paying tax. If a contractor’s employment status is deemed to fall within IR35, the contractor has to pay the same Income Tax and National Insurance Contributions as a normal employee, and the hiring firm would also need to pay additional tax contributions to HMRC.
A version of IR35 was initially introduced in 2000 but in April 2017, the government implemented stricter regulations for the public sector, by shifting the responsibility for deciding whether the rules apply from the individual contractor to public authorities.
The changes that were due to take effect this month constituted the same legislation, but now extended to the private sector and are expected to affect roughly 170,000 additional contractors. Starting from 6th April 2021 every medium and large private and public sector business in the UK will become responsible for setting the tax status of any contract worker.
A source of anxiety for the freelance community
The fundamental issue with IR35 has been the lack of clear guidance and information regarding what the implications of these rules are and who exactly they concern. This ambiguity has resulted in numerous headaches and fears around non-compliance, and a prevailing sense of uncertainty both for the freelancers and businesses.
A recent survey by Harvey Nash in November 2019 found that one in five businesses were planning to axe contractors completely, to ensure they were fully tax compliant ahead of the IR35 changes. Meanwhile, a report by IPSE highlighted that over 32% of freelancers were planning to stop contracting in the UK because of the confusion and anxiety it was causing them.
With these figures in mind, it's no small wonder that concerns have been raised about how IR35 might negatively impact the UK economy. On one hand, IR35 has made the prospect of hiring contractors far less appealing for businesses, and on the other, some contractors reported they might have to increase their fees to cover the rise in taxes, which could be as much as 30 percent if the business they work for moves them to the PAYE system.
The uncertainty surrounding IR35 has led to anxiety and confusion amongst many freelancers and businesses, but it’s something that can be easily overcome by finding out just how, and even if at all, IR35 will affect them.
Take a deep breath, here's what you need to know
It’s important to point out that the new IR35 regulations do not apply to all contractors, and as such it will not concern all businesses employing contractors either.
Firstly, although sole traders still need to be aware of the rules surrounding their employment status, they are exempt from the new IR35 rules, since they do not operate through a company structure.
Secondly, for contractors doing work for smaller companies, with fewer than 50 employees or with less than £10.2 million in annual turnover, the rules remain the same – it is up to the individual to decide whether they fall under IR35.
Lastly, if you, as self-employed, carry out work for a fixed fee, are paid at the end of a project, generally work for a number of different clients, and have control over how, when and where you work, the new IR35 changes may not apply to you.
The best way to find out is via the HMRC website, and its CEST tool, which assesses whether you should be classed as employed or self-employed.
It’s important to note that it is within a worker’s rights to challenge the client’s determination of their employment status if they disagree with it, and companies are legally obliged to let a worker know within 45 days why they assessed them as they did.
Now that the implementation of the new IR35 rules has been postponed, contractors have a full year to do their research properly, and to establish what is best for their future.
With the tax benefits of working under a Limited company disappearing it will be worth considering employment as an alternative to continuing work as a freelancer. By moving to PAYE, you could have a more secure income as well as additional benefits, and for some, it will be worth having discussions with current clients about the option of employment, if this suits both parties.
That being said, self-employment also comes with many benefits and may still be the alternative that works best for you.
All in all, despite the apprehension around the financial ramifications of these tax rules, it’s definitely not all doom and gloom for the freelance community. The advent of IR35 in April next year won’t signal the end of contracting, if contractors and business owners take the time to truly comprehend to whom IR35 applies and what the implications of non-compliance are.
Dan Stopp is the UK Accounting Manager at Bokio (opens in new tab)
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