Recent research by contractors’ accounting firm Inni Accounts found that more than half of all contractors working for private companies were planning to leave their clients once HMRC’s new tax reforms that were due to come into force on April 6 rather than face IR35.
And a majority of those who intended to stay with their clients said that they would wait for another role outside IR35 to open up so that they could shift away from the legislation as quickly as possible. Just under one in 10 had taken on a permanent contract.
On the side of the businesses hiring contractors and freelancers, the survey found that many companies preferred to negate the risk altogether. Almost a quarter of respondents – 23.1% said that they had received a blanket ban from their clients. Meanwhile, a number of major companies, including HSBC, Barclays, RBS and GSK had announced that they would no longer employ off-payroll workers in advance of IR35 with many others predicted to follow suit.
However, in recent days, the Government have announced that their plans had been put back a year as part of their response to the health and economic crisis caused by the coronavirus pandemic.
But what was all the concern about in the first place?
What Is IR35?
IR35 refers to two separate piece of tax legislation enacted in an attempt to combat tax avoidance by workers and the businesses hiring them. In these cases an employee works through an intermediary such as a limited company and is thus technically a contractor. However, because they’re working under the same conditions and rules as an employee, HMRC believes that they should be taxed as an employee (with a few differences).
Why Was IR35 Introduced?
HMRC considers the contractors described above as ‘deemed’ or ‘disguised’ employees. They perform their job as if they were regular, contracted employees but they are engaged on a self-employed basis – both the contractor and the client pay less tax as a result.
This has been referred to as the ‘Friday to Monday’ phenomenon. An employee will leave work every Friday for the weekend, knowing that they will go back into the same role on Monday morning and do exactly the same job as they were before. This is not contracting or freelancing in the eyes of HMRC – in their opinion, the employee is doing the same job as all of the other full-time workers in the organisation and they should not receive favourable tax treatment.
When a company hires someone as a contractor rather than a regular employee, they no longer have to pay employer’s National Insurance Contributions (NICs) of 13.8%, or the Apprenticeship Levy of 0.5%, and they are not required to offer contractors the same rights and benefits as full-time employees.
IR35 also impacts contractors financially. A contractor working within the scope of IR35 will find that their income is reduced by up to 25% by increased taxation, costing them thousands of pounds every year. There is therefore a strong incentive for contractors to structure contracts and working arrangements to side-step IR35 rules.
Has IR35 Succeeded?
Whilst IR35 seems to make sense in some ways in that it requires everyone working the same roles to pay the same amounts of tax, some argue that the Government has failed to take into account that contractors perform their role without the benefits and protections offered by full-time employment including holiday and sick pay. Many contractors argue that it is unfair to tax them as an employee as a result.
According to calculations from Inni, the now postponed change in legislation could have cost the UK economy more than £2.2bn in taxes rather than raise extra revenue.
James Poyser, chief executive of Inni, said: "It's clear from the scale of departures that the cost of blanket bans and unfair assessments far outweighs the business case HMRC argues.
"The legislation is fundamentally flawed and rolling it out will have grave implications for UK PLC and the lives of hard-working skilled people."
Tax Rules Softened
Following the outcry, HMRC had decided anyway to re-evaluate IR35 changes due to come into force from April. Whilst the same rules would have remained in place for contractors starting in new roles, any contract already in place before April 6th would not have been affected.
HMRC had said that these changes were as a result of the heavy criticism levied on the legislation since it has been announced and that it showed that it does want to listen to the contracting community’s views.
Dave Chaplin, a campaigner against the changes said: “I sense that this is the Treasury and HMRC now realising that they have a major problem on their hands and the implementation of the legislation will not be smooth.
“It is highly indicative of the damaging chaos we are seeing.”
IR35 changes – another 12 months to prepare and lobby
HMRC’s interpretation of which working arrangements are within the scope of IR35 are far from clear – they lose many of the challenges brought to the First Tier Tribunal by taxpayers accused of being “disguised” employees.
To ensure that your arrangement with your client is outside IR35, flexibility should be built into your contracts with them.
Ross Pounds of Dinghy, an organisation providing specialist insurance for freelancers, says: “If you carry out work for a fixed fee, are paid at the end of a project, generally work for a number of different clients (often at the same time), and have control over how, when and where you work, you are likely to be fine.
“However, if your working hours are decided by someone else and you can be told what tasks you’re working on, where you’ll be working, and how you should work, then you may well fall under the ‘disguised employee’ banner, and therefore could be seen as being inside IR35.”
You may also look on the HMRC website for more information on whether or not you are classed as employed or self-employed – be aware though that there is controversy about the accuracy of the results of HRMC’s test.
If you do find that your current arrangement is deemed within the scope of IR35 then you need to ensure that you are paying the appropriate level of tax. This will usually mean making a ‘deemed payment’ at the end of each tax year to bring your tax affairs up to date. You may also want to consider a working practices review to ensure that you are working compliantly under the rules of IR35. Your accountant can help you with this.
For other contractors, it may be worth looking into switching employment, or looking for a new role as a permanent employee in order to avoid taking a massive tax cut as well as being without the benefits you are entitled to as an employee.
Due to the challenges we are all facing due to the current coronavirus situation the government had really no choice but to delay this legislation. Once this crisis has passed the same questions and concerns regarding this legislation will still remain, so planning for the eventual introduction of the new IR35 rules should still be on the to do list for those affected.
TFMC can advise you on the structure of your business and see if there is a way that your income can be protected, and that your clients can still engage your services with the minimum impact on them. To find out more please contact us today on 08004704820 or email [email protected] to discuss your options with our team of experts.