IR35 – What is it and What are the Implications?

Private sector IR35 reform is set for April 2020, when rules currently operating in the public sector become effective to all businesses in the private sector.

What is IR35?

IR35 is an abbreviation used to describe two sets of tax legislation that are designed to combat tax avoidance by workers, and the firms hiring them. These are individuals who supply their services to clients via an intermediary, such as a limited company, but who would (effectively) be an employee of that company if the intermediary was not used.

So, basically it is tax legislation that governs contractors working through a PSC (Personal Service Company) or contingent workers, employed directly or through an agency.

So now we know what it is…what is changing?

Since 2000, contractors have been responsible for assessing their own IR35 (tax) status, essentially making the decision whether they fall inside or outside of the legislation.

From April 2020, this decision will be the responsibility of the end hirer, i.e: the client company. Now this is where it gets tricky, if the end hirer concludes that the worker falls inside IR35 (using the government checklist for guidance) then provisions must be made to account, and pay, the related tax and NIC to the HMRC, including the additional cost of Employers NIC.

Only medium and large companies will be affected, there are a number of indicators that define the size of a company, if your business meets two out of the three criteria you will be required to adhere to the new legislation; if your turnover is over £10m, your balance sheet is over £6m, or your business employs more than 10 people.

What implications can this have to the end hirer?

Should the end hirer conclude that a worker falls inside IR35, the additional employment cost for a single contingent worker could be up to 25%.  Therefore, contractors are likely to suffer reduced income as client companies seek to recover their additional costs. This may discourage them from continuing their work as a contractor and/or start looking elsewhere at more flexible options where they are classified outside IR35. Loss of highly skilled contractors and disengagement are major operational risks which could result in delays to critical projects due to loss of resource.  There are also heavy fines for any company incorrectly classifying contractors as ‘Out of Scope’ when they really should be classified ‘In Scope’.

How can we help?

If IR35 seems like a bit of a minefield, we will be on hand to support our clients, offering the following:

• Assisting our client companies in making an employment status determination and pass this on with evidence (Using In scope/Out of Scope Checklist)
• To assist in communicating directly with client contingent workforces.
• To help clients avoid having to pay fees for failure to meet obligations.
• To assist in implementing a status dispute process.

For more information, or to discuss in more detail contact Tom Webster on 0116 303 3560 or email tom.webster@optima.streamstudio2.co.uk