Changes to the implementation of IR35 are due to come in this April – will you be affected? HMRC (and the govt., as the Budget was silent on this) have confirmed that changes due to come in this April will be implemented despite widespread calls for them to be delayed (again).
What Is IR35?
Named after the press release that established this back in 1999, this is designed to ensure employers are responsible for assessing whether or not contractors are effectively employees, so need to pay income tax and national insurance (NI). It is aimed at preventing tax avoidance by “disguised employees” – contractors with permanent positions who don’t pay the same tax or NI as standard employees.
It previously applied to the public sector (e.g. the BBC), but HMRC will be rolling this out to the private sector (delayed by 1 year because of the pandemic).
It applies to all companies apart from ‘small’ companies (as per the Companies Act definition), which means they meet 2 out of 3 of the following criteria:- (i) less than £10.2 million of turnover, (ii) less than £5.6 million of gross assets OR (iii) less than 50 employees. In these situations, the responsibility for applying IR35 stays with the worker (at least in theory).
What Is Changing?
Prior to 6 April 2021, freelancers and contractors working in the private sector have been able to decide their own workers’ status. So, they’ve able to identify as freelancers and contractors and sort their own tax out at the end of the financial year.
However, from this date, the onus shifts from the workers to the clients they are servicing. Clients are required to evaluate their relationships with them – if they deem these workers fall inside IR35, then it is their responsibility to pay them as a “deemed employee”, thus incurring all the associated tax and NI costs.
What’s Wrong With That?
Well, apart from it being less tax efficient for the worker – and, remember, many of them were encouraged to set themselves up as freelance, or even told they wouldn’t get jobs if they didn’t do so – it could seriously affect the way the creative services industry works (and that’s not great timing with the industry struggling so much right now).
Some argue that:
- it will be more expensive to take on freelancers and the additional costs may have to be skimmed off of freelancers’ fees if a company feels unable to absorb it or pass it on to a project client;
- freelancers might be less inclined to work for larger companies (or they may have no choice) because it’s going to cost both more money to do so;
- both smaller and larger firms may miss out because of certain rules and exceptions;
- companies will take a risk averse strategy and wrongly place contractors under the regulations; and
- a lot of smaller firms will rely on freelancers, but might find that there are fewer around.
They are convinced that the forthcoming IR35 changes will have a disastrous impact on business.
If clients are required to evaluate their relationships with freelancers, HMRC have set up an online tool – the CEST test – to help make a determination and they are supposed to apply the findings of that determination.
The CEST is clunky, sometimes unclear and sometimes doesn’t give a clear-cut answer and, anyway, if companies take a risk averse strategy, it may not matter – they will just determine freelancers to be employees regardless.
How Can We Help?
Well, we’re not magicians, we’re only accountants, but it helps to use a firm that:
· understands the rules and the problems;
· understands the possible options; and
· can work with you to try and find a solution.
Please contact any partner at Silver Levene for further assistance.
Tel: +44 (0) 20 7383 3200