The Private Sector needs to get ready for IR35
Flexible workers are a crucial part of the labour mix. Without them, firms wouldn’t be able to hire the short-term specialist skills they need, or reap the value of experts which they don’t have the capacity for on a full-time basis. Following the changes to IR35 legislation announced in the Autumn Budget, the way that businesses will be able to utilise professional contractors is changing.
From April 2020, the IR35 rules that were rolled out in the Public Sector in April 2017 will apply in the Private Sector, but only for medium and large sized businesses. This obviously opens up a lot of questions about how exactly this will be defined, but it’s clear from Phillip Hammond’s budget speect that the Government wants to address the “widespread non-compliance” that they perceive is occurring in the Private Sector and level the playing field between Private and Public sector engagements. It could be said that applying legislation only to larger businesses will still create disparities in how workers are taxed depending on the organisation they work for, but we await futher clarity from the Government on this.
But why has this come about? Whilst many businesses genuinely turn to contractors for consultancy services, the Government believes that up to a third of current contractors are actually being engaged and managed almost on a permanent basis. In other words, there is little difference between these workers and permanent members of staff doing the same or similar roles.
The issue this presents is that there are tax contribution differences between someone operating via their own business, or someone being fully taxed by the PAYE system. The government estimates that contractors wrongly assessing their tax status could end up costing the economy £1.2 billion by 2021/22 – hence the need for the law change.
IR35 explained – why firms need to take note
IR35 is a tax legislation designed to combat tax avoidance. It’s where workers supply their services to clients via a third party, (such as a limited company); but in reality are performing services in the same way as an employee.
To help kickstart the clamp down, HMRC introduced changes to IR35 in the public sector in April 2017, which is now following into the private sector. The changes have shifted the responsibility in making IR35 status assessments from the Limited Company (i.e. the worker) to the agency and the end client. This means that every business using contractors needs to understand how IR35 affects them and be able to assess whether their workers fall in or out of ‘scope’ of the legislation for each assignment.
What are the consequences of getting it wrong?
- Financial penalties
Employers or recruiters now have the responsibility of assessing whether the contractor is ‘inside’ the scope of IR35. If they fail to deduct National Insurance and applicable tax before paying the worker, then they are now liable for the unpaid tax and NIC payments, which could be a costly mistake to make.
The legislation will require ‘reasonable care’ to be taken when making assessments. Reasonable care could be difficult to prove if a blanket approach was adopted when making status assessments, but perhaps of equal concern to businesses and the recruiters placing them is that contractors will want to work for firms that understand the rules, and have taken appropriate steps to ensure compliance. The best talent will likely be attracted to businesses who have taken measures to understand and manage the legislation reform effectively.
3. Increased costs
A common reaction from workers within the public sector who were assessed as ‘inside’ IR35 was to ask for an increase in their daily or hourly rate. This enabled them to compensate for the impact of their tax and NIC contributions being deducted at source. It’s likely this will happen in the private sector too, so firms need to be aware that the cost of contingent labour may increase.
The changes to IR35 in the Private Sector that were annouced today will change how firms use contractors moving forwards. This legislative change presents firms with the opportunity to readdress their workforce needs and work with experts to help them develop a strategic, sustainable workforce plan, which will still allow them to benefit from the talented flexible workforce that they currently utilise. What matters most is compliance, so addressing the three areas above will stand businesses in good stead as they navigate the changes.
To help firms understand IR35 more fully, Outsource UK has written a whitepaper outlining the changes and what it means for businesses. For more information, please click here.