Preparing for more IR35 changes
21st January 2019
Most contractors and freelancers will have heard of the controversial and unpopular IR35 legislation, which has applied to the public sector since April 2017.
From April 2020, medium-sized and large businesses in the private sector will be responsible for setting the tax status of any contractor or freelancer they take on.
These companies will carry the can should HMRC decide it has made any incorrect assessments when it comes to off-payroll working.
But what’s in store for the UK’s army of private sector contractors and freelancers? And what can you do now, with 15 months to go until it takes effect, to prepare?
IR35: What is disguised employment?
Understanding the concept of IR35 for freelancers and contractors in the public sector has been like trying to successfully navigate the garden maze at Longleat in recent years.
It surrounds something the Revenue calls disguised employment, which is where someone works in the same way as an employee but classes themselves as self-employed.
This deception being committed by a few has prompted HMRC to crack down on all public sector contractors to ensure everyone is paying the right amount of tax and national insurance.
Various tests are used to determine whether or not IR35 applies to you, and the legislation is being extended to the private sector from April 2020.
How will IR35 in the private sector work?
Under IR35 from April 2020, the onus is on employers to determine the tax status of off-payroll workers. This usually applies when you supply work through your own company for another business.
The contractor should pay income tax at their marginal rate and national insurance contributions (NICs) at 12% if they work in a similar way to that of a full-time worker.
Private sector freelancers currently pay less tax and NICs than their public sector counterparts, but that will change when larger firms set how much income tax and NICs the worker owes.
The smallest 1.5 million private sector businesses that supply personal services will not be caught up in the extension of the legislation from April 2020.
IR35: Impacts on businesses
With IR35 legislation in place for the public sector since April 2017, the precedent has been set for what businesses can expect when it is extended to the private sector.
Many public sector businesses saw the burden of bureaucracy increase, with the time and resources spent on grappling with the complex legislation rising accordingly.
Scores of contractors and freelancers have left the public sector since 2017, creating significant skills shortages that businesses have been left to try and fill.
Such shortages have caused businesses to delay projects, which have subsequently seen the number of available contracts decline.
If you’re a contractor or freelancer working in the private sector, you still have time to plan what path you want to take before IR35 extends to your sector.