Businesses using the services of contractors, or involved in the provision of contractors’ services, need to prepare for IR35 changes coming in April 2020.
They will leave many businesses with the responsibility for determining whether this legislation applies to its contractors and, if it does, it could also shift responsibility for collecting additional tax and national insurance to the business.
When IR35 was reformed in the public sector, many contractors walked-out and left public sector organisations without workers, so prepare now to avoid disruption for your business next year.
The Government believes more than 90 percent of people caught by IR35 have historically ignored their responsibility, resulting in over £1billion in unpaid tax and national insurance to-date.
In 1999 when the Government first consulted on IR35, their intention was that the businesses making use of contractors’ services would be liable for any tax and national insurance if a deemed contract of employment existed, but this approach was abandoned after pressure from large corporations.
Fast forward 18 years and the Government’s solution, as introduced in 2017, to ensure contractors comply with IR35, was to revert to their original plan, initially for contractors providing their services to public sector bodies.
Since 2017, organisations operating in the public sector have had to determine whether IR35 applies to contractors providing their services to them through their own company; and if so treat them for tax purposes as if they are employees, deducting income tax and national insurance before paying their invoices.
IR35 acts to reduce the take-home income of the contractor because they suffer taxes as if they are employees and it increases the cost of the engagement as the public sector body must pay employer’s national insurance at 13.8% on top of the contractor’s fee. Hence, as a result of the 2017 changes, the Government estimates that £550million of additional tax and national insurance has been raised, so it comes as no surprise that the same changes are being extended to private sector working arrangements from April 2020.
Following two consultations on the matter, we now have draft legislation to give us an indication of how IR35 will work in the private sector.
The revised legislation means that all medium and large organisations will be responsible for assessing whether IR35 applies for individuals working for them through their own company.
However, where individuals work through their own company and provide their services to small organisations, the old IR35 rules will remain unchanged and it will be up to the individual to determine their own IR35 position and to account for any additional tax or national insurance to HMRC directly.
The relaxation for small organisations is welcome, with an organisation being classed as small if it satisfies two or more of the following:
- Annual turnover is less than £10.2million.
- The balance sheet total is less than £5.1million.
- The number of employees is not more than 50.
Businesses, contractors and agencies need to address a number of key issues in the going forward, to meet the requirements of the IR35 changes. In two further articles, we will review what individuals and organisations need to do to be ready for the changes.