Does your business engage contractors, working through personal professional service companies, rather than as sole traders? IT specialists, perhaps, or marketing specialists? Many businesses do, and in areas such as IT, the use of such contractors is very common.
But if your business does engage such contractors, then from 5 April 2020, those individuals—and your business—will be caught up in the latest tightening-up of the so-called IR35 regime. And be warned: this new tighter regime has already caused chaos in the public sector.
At best, what will happen from April 2020 onwards will be additional costs for your business. At worst, it could find itself in an administrative nightmare, potentially exposed to punitive tax ‘claw-backs’ by HM Revenue & Customs, and with disgruntled and unhappy contractors.
The good news: thorough, prior preparation can considerably ease such difficulties.
April 2020 is now less than six months away. So if you’re not actively preparing for the onset of this new IR35 regime, then it’s time to start.
What exactly is happening?
The IR35 regime came into force in 2000, designed to clamp down on tax avoidance by individuals who were in effect ‘disguised employees’. Invoicing their clients through personal service companies, they were able to lower their tax bills by paying corporation tax, instead of income tax and national insurance.
IR35 sought to bring an end to this, imposing a set of tests to determine if contractors were genuinely self-employed contractors. Were contractors taking risks, were they working for more than one client, and were they determining for themselves how they discharged their responsibilities? If not, they were more properly regarded as employees.
But the rules weren’t difficult to sidestep, and there was little practical risk to contractors in ignoring them as HMRC didn’t have the information or resources to enforce the rules against each individual contractor.
What’s more, the end client was happy to turn a blind eye: paying contractors’ personal service companies avoided the need to pay employers’ national insurance and employment related benefits such as holiday pay, sick pay and maternity leave.
Better still, in the event of any HMRC investigation, it would be the contractor’s limited company which would be liable for any tax payment, not the end client.
From 6 April 2020, private sector companies, with few exceptions, must decide whether their contractors are inside or outside IR35. And if they decide that they are inside IR35, then they must deduct employer’s and employee’s NI and income tax as if those contractors were employees.
A further sting in the tail: if private sector employers decide wrongly, and erroneously deem that contractors don’t fall inside the IR35 rules, then it is the end client as the deemed employer, not the contractor, who is liable for the unpaid taxes.
This has happened before. Back in 2017, the government changed the law so that public sector companies had to assess whether IR35 applied to their contractors.
Contractors saw their take-home pay reduced by up to 25%, and also found themselves unable to claim tax relief on travel and subsistence expenses. End clients found themselves paying employer’s national insurance—and sometimes higher pay rates, to compensate contractors for the loss of income.
Unhappy contractors quit in droves, heading to the private sector. Without doubt, say insiders, public sector relations with contractors suffered.
And now, the same situation looks set to occur in the private sector. From 6 April 2020, only private sector companies with fewer than 50 employees, less than £10.2 of annual revenues, or with less than £5.1 million on the balance sheet, will be exempt—and only when at least two of those conditions are met.
What to do?
The clock is ticking: companies will need to be compliant by 6 April 2020. And so, if your business isn’t already prepared for IR35, then it’s time to start preparing.
Payroll systems will need to be amended. Contractors’ contracts will require amending, or setting up. And if contractors are unhappy about being remunerated through the payroll, with tax deducted, then they will have to consider whether they can legitimately structure their contracting businesses differently, so as to stay outside the IR35 rules.
Discussions will have to be had, decisions made, and consultations carried out. It’s an area of considerable complexity, and there isn’t really a ‘one size fits all’ solution.