Some long-awaited clarification has come from the government in relation to the looming IR35 legislation set to rock the contracting and interim working world after months of changes being put on hold. Following a 12-week consultation published in May 2018, the government promised to extend IR35 rules to medium and large organisations in the private sector, meaning that any companies with over 50 staff will fall under its purview – but only now have any timescales been announced to roll out the changes.
Inland Revenue Notice 35 (IR35) is a group of tax rules relating to the use of temporary contractors and the paying of tax on contractor salaries which has been in effect since 2000, but has been tightened in the public sector since 2017. These tightened rules have not had a definitive implementation date for the private sector until last week when draft legislation was put forward, setting a date of 6 April 2020.
The IR35 rules have the stated aim of ensuring that individuals who effectively work as employees within businesses make roughly the same tax and national insurance contributions as permanent workers. However, industry experts have already voiced concerns that much of the admin involved is near-impossible, relying on making assessments of tax status for employees before they start work and before the extent of the work is known. The administration of such checks will be a huge undertaking for some companies reliant on contracted work and will result in fines if administered incorrectly.
HMRC estimates that the changes are expected to affect 170,000 contractors working through their own personal service companies (PSCs) as well as up to 60,000 companies which use contractors working through a PSC. HMRC has also estimated that the changes will bring in nearly £3bn in additional tax revenue. It is important to note that self-employed individuals not operating through a PSC will not be affected by the legislation.
But what does this mean for employers and contractors? Effectively, for a lot of contract employers there will be a cost hike of around 14% and an increased payroll administration cost involved in sorting ‘employed’ workers from those unaffected by IR35. For contractors, this could mean a lower net income and some subsequent shifting to more permanent work as the perks of contracting dwindle. Some have also speculated a large rise in contractors leaving the country to pursue less complicated tax arrangements elsewhere, leading to further skills shortages in areas already squeezed by the effects of brain drain, such as the North-East and North-West.
Many experts have warned companies not to wait until the draft legislation is passed through parliament after the Summer recess but to start putting plans in place now, as last-minute, blanket policies will be badly received by HMRC and may incur large fines.
For more information, you can consult the draft finance bill here.