August 14, 2019

IR35 and the plans to level the playing field

All those private sector contractors out there and those start-ups/scale-ups who use contractors, that secret fear in the back of your mind is getting closer to becoming reality –  HMRC has you in its IR35 sights and April 2020 is getting closer.

Anyone out there not know about IR35?  If you use contractors in your company, and we know a lot of tech companies do to access specialised skills, or you work as a contractor through a PSC (Personal Services Company) in the private sector, then you really do need to get to grips with it quickly.

What is IR35?

Back in April 2000, the government began its focus on prevention of tax avoidance by workers supplying their services ‘through’ a PSC in a way where they would normally have been taxed as an employee if they had provided their services directly.  These ‘deemed employees’ needed to pay tax and NI, as did the contracting client, as if the worker was employed.

All workers operating through a limited company/PSC (personal services company), ie, an intermediary, had to self-declare whether they were truly operating as self employed; but this continued to concern the government.

What was this concern?  Well, there are a number of benefits to operating as a self employed worker:  the expenses that can be offset against taxable profits is wider than an employees; payments can be made as dividends as an alternative to earnings and thus remove the requirement for NICs; and there are cash flow benefits with tax not being deducted regularly.  Clients also benefit as they don’t incur employer NICs on any payments and do not provide the standard employee rights like holiday and sick pay. All this means less tax revenue in HMRC’s coffers.

What is new?

From April 2020 Private sector employers will fall under the same rules as the public sector. This means private sector employers hiring contractors will be responsible for determining their IR35 status.

One small glimmer from the consultation was the government’s decision to remove small organisations from the reform and the need to determine the status of the PSC or off-payroll workers they engage.  They will use the definition found at section 382 of the Companies Act 2006 for companies qualifying as small:  The qualifying conditions are met by a company in a year in which is satisfies two or more of the following requirements:

  • Annual turnover not more than £10.2 million.
  • Balance sheet total not more than £5.1 million.
  • Number of employees not more than 50.

And so it will be left to the contractor to make the decision as currently, for small businesses.  If you are considered a small company, then great, but the uncertainty going forward is small reward.

For Medium/Large businesses, the key criticism of a lack of an independent appeals process for contractors who do not accept the ‘in scope’ assessment of their working position has also not been acknowledged; the government has persisted with its proposal to introduce a client-led dispute resolution.

 Need help or advice on IR35?

These changes are going to have a profound impact on the large number of software developers and the start-ups within the tech industry which relies on them for flexibility and access to a wide range of specialisms. The industry remains uncertain as to what the future holds.  If you think you might be affected, then get in contact with us sooner rather than later.

 

 

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