Like or loathe the idea, HMRC is set to revamp the independent contractor market in the UK via imminent new rules to IR35 this April.
Under the IR35 legislation, if a contractor is deemed to carry out the same or similar work as a permanent employee, their employer is then required to deduct income tax and NI contributions as if they were an employee. This was introduced to ensure workers undertaking similar roles paid similar tax regardless of whether they are an employee or contractor.
Currently, the assessment of whether a contractor is within IR35 or outside is determined by the contractor themselves (or their limited company). If the contract is inside IR35, the limited company will pay Income Tax and NICs to HMRC.
However, new IR35 rules set to come into place from April 6th this year will shift the responsibility of this assessment onto employers. If the IR35/ off-payroll working rules apply, the worker’s fees will be subject to tax and National Insurance contributions paid via the end client or agency through which the contractor works.
Why are these changes being implemented?
The new IR35 legislation (also known as off-payroll working) comes after the Government suspected that some contractors’ misclassify their employment status for tax purposes and that this would cost the economy £1.2bn each year by 2022.
Who is likely to be affected?
- Mainly medium and large-sized businesses outside the public sector that engage with individuals through intermediaries such as personal service companies (PSCs).
- Public sector organisations who will be impacted by changes designed to improve the operation of the rules, for instance, around the employment status disagreement process.
- Recruitment agencies and other intermediaries who supply staff through PSCs.
- Individuals who supply their services through an intermediary, such as a PSC, and who would be deemed employed if engaged directly.
Delays to the IR35
The arrival of the IR35 legislation was originally planned to be implemented last year, however, like most things that were planned in 2020, this was impacted by the Coronavirus pandemic.
The gift of an extra year to prepare was widely welcomed by both businesses who had more time to prepare and organise processes, and contractors’ who have expressed concerns over what the new rules will mean for their freedom and income.
The measurement criteria
Determining whether IR35 applies to your contract is a complex matter. However, there are three key principles that will determine the IR35 status:
- Supervision, Direction and Control: What degree of supervision, direction and control does your end-client have over what, how, when and where you complete your contract and day to day work?
- Substitution: Are you required to carry out the work yourself, or can you send someone in your place?
- Mutuality of obligation: Is your client obliged to offer you work, and are you obliged to accept it?
As a contractor, you’ll need to demonstrate that the principles don’t apply to your contract and working practices to avoid being affected by the incoming rules. If your contract with an end client is a contract for services, rather than a contract of service, it’s likely to fall outside the scope of IR35. An example would be if you can send another person (‘substitute’) to perform the services agreed in your contract in place of you, there’s no obligation of personal service and IR35 shouldn’t apply
The impact of coronavirus on working with contractors
Since the UK first went into lockdown in March last year, the way organisations worked with contractors would likely have changed significantly. For example, pre-Covid, there may have been a presumed mutuality of obligation (MOO), as mentioned above, to provide work and offer services if a contractor had worked for the same business for some time. However, during the pandemic, many contractors will have experienced a big reduction in the amount of work offered to them. As stated by PwC, “does this imply that there was never a MOO?
Pre-pandemic, contractors may have been largely indistinguishable from employees in some businesses. Now we’ve had almost a year where contractors are working from home, using their own equipment, and are not under direct supervision. Again, this is likely to impact the tax position.
This highlights the need for businesses to make decisions in light of Covid-19 and how this may have sparked change in the way people have worked since lockdown. Specifically, a look into a potential change around the oversight levels and control over contractors who have shown that roles can be undertaken at home with perhaps less supervision and direction.
Where roles might have originally been assumed to be within IR35, it’s important to take a step back and reconsider the questions again and how responses may have changed since the pandemic.
What do the new rules mean for IT contractors?
Problematically, it’s been reported that some businesses have decided to adopt a ‘blanket approach’ covering their entire company against the tax liabilities and national insurance costs.
This approach to IR35 has seen businesses assessing all contractors as ‘inside-IR35’-deemed employees or telling all contractors that they must become contractual employees. Some businesses disengaged from contractors altogether, in the worry that the IR35 reforms will bring financial costs that they simply can’t take on in what are very challenging times. Zurich Insurance is the most recent high-profile company to become under fire over a reported contractor blanket ban in response to the incoming rules.
This, by no means, suggests that HR departments are deliberately providing inaccurate information. But what it does suggest is that there may be misunderstandings of how contractors operate and what the new IR35 rules entail.
On the other hand, the impact of Covid-19 has led many businesses to re-assess their resources, increasing the demand for the flexibility of off-payroll workers. As Seb Maley, CEO of self-employed insurance and tax specialist Qdos explained to Contractor Weekly:
“Reports of blanket IR35 determinations may make the headlines – and rightly so – but it doesn’t portray the whole picture. Behind the scenes, thousands of businesses are readying themselves to make fair and compliant IR35 status decisions by April.
“The changes, while needless and totally short-sighted, can in fact be managed. Speaking from experience, we’ve noticed a big uptake in the number of firms ready to compliantly engage contractors outside IR35 going forward.
“In the coming months, I expect even more businesses to approach IR35 reforms in the right way.”
Are you an IT contractor or businesses needing help understanding IR35 rules? Contact talent@growwithhde.com today