With the ‘off payroll’ rules of IR35 extending into the private sector from April 2020 onwards a lot of contractors are busily preparing for the changes it will bring. Yet it is not only interim workers who will be affected by the change, and employers in the private sector also need to have a clear picture of how the most recent changes to IR35 coming into force in their sector will affect them, their business, and their hiring practices.

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Yet IR35 is a bit of a foreign language, even to those of us in the industry whose business it is to know these things. If you’re struggling to wrap your head around exactly what the iminent extension of the ‘off payroll’ rules mean for you and your business, there are two things you can do immediately to clear things up:

  1. Help us out by filling in this quick survey to give us a better idea of what you know, and need to know, about IR35. That way, we can ensure we’ve provided you with all the information you need.
  2. Read on for our no-nonsense guide to IR35 and what it means for your business…

What Is The IR35 Reform?

The Intermediaries Legislation, colloquially referred to as IR35, has been confounding contractors and business owners since 2000. With the core goal of removing any tax advantages for individuals who are offering services through limited companies when they are not genuinely in business independently.

To put that another way, it targets individuals who have a single client for whom they work full-time, but are not on payroll,  instead operating as a ‘disguised employee’ and billing the business as a freelancer or limited company.

While it’s not targeted at genuine freelancers and contractors, it is aimed to filter out those whose working practices are essentially akin to traditional employees, yet reap the tax rewards of remaining independent.

Although there have been a flurry of amendments to IR35 through the years, each new incarceration of the Government has continued to claim that the number of limited companies illegitimately operating outside the rules is too high. IR35 is updated to more effectively catch all those pesky disguised employees, and the business world goes into freefall for a brief period while everyone scrabbles to comprehend what the latest changes mean.

The ‘off payroll’ rules came into force in April 2017 and immediately affected any contractors operating in the public sector. Thus far, however, private sector businesses have been unaffected by the changes. That’s about to change, and private sector employers will soon find themselves responsible for deciding whether each of their contractors falls ‘inside’ or ‘outside’ the bounds of IR35.

It was previously up to the contractor to make this determination. Now, employers will need to make a determination for each individual, affecting whether or not they deduct income tax and NICs from their contractors’ pay, as well as whether they need to be paying employers’ NICs.

What Was The Effect Of IR35 Changes In The Public Sector?

The response of public sector contractors to the changes differed depending on the individual, however there were (broadly speaking) three reactions:

  1. Contractors accepted they were now inside IR35 and accepted lower rates – this is not good for them.
  2. Contractors increased their rates in order to cover the loss of earnings they experienced as a result of the changes – this is not good for clients/employers.
  3. Contractors declined to take on new contracts and left the public sector entirely – this is not good for either the contractors or the clients/employers.

While HMRC view the results of these changes as positive, businesses in the public sector have experienced a sudden a somewhat catastrophic loss of talent, as well as delays in project completion and delivery.

With 51% of hiring managers in the public sector losing skilled contractors as a result of the changes, and 52% experiencing delays, rising costs, and project cancelations, the prospect of the changes hitting the private sector is understandably daunting.

Why Are The IR35 Changes A Problem For Employers?

The issue with all of this is the difficulty involved in fairly determining whether a contractor falls ‘inside’ or ‘outside’ IR35. Guidelines are widely criticised for being unclear, and given that making an incorrect determination carries penalties for employers, many have opted for a blanket ‘inside’ IR35 decision that’s applied across the board, regardless of individual circumstances.

While this is safer (in some respects) for employers, it’s problematic and frequently unfair to contractors, some of whom are being ruled ‘inside’ when they are in fact genuinely outside. The knock-on effect of this so far has been that many contractors have abandoned public sector   work in favour of private sector businesses, where they can still operate without the determination being made.

That all changed during the 2018 Budget, when the Chancellor made the announcement that from April 2020 the ‘off payroll’ rules are to be extended to all private sector business, meaning only ‘small business’ will now be excluded.

Why is this happening? As ever, the bottom line is money, with the Treasury anticipating the roll out to private sector businesses will net them a further £1.3bn annually by 2023.

How Will Private Sector Employers Be Affected By IR35?

Given that so many large companies in the private sector rely on short-term contractors, it’s hardly surprising that so many are looking to take immediate action and ensure they’re well prepared ahead of the changes coming into force in April 2020.

While the timescales involved are tight, there should be plenty of time for organisations to get a clear view of how the changes will affect them. This will enable them to take proactive steps (such as upskilling their existing employees to cover any skill gaps that may occur due to a loss of contractors), and ensure their internal IT systems and processes are up to snuff and capable of dealing with all the new rules.

The changes as a result of the new IR35 regulations are entirely manageable, but it’s important to get to work immediately to ensure the transition is as smooth and painless as possible.

Part of the issue caused by these changes is the very fact they focus on larger businesses rather than smaller organisations, when it is the large ones who find themselves in the least tenable position when it comes to accommodating the new rules. This is largely due to the impact the changes will make on their business’ IT infrastructure when it comes to paying their contractors.

The complexities of processing off-payroll workers’ invoices are about to get quite extreme. As a result, a lot of companies are going to have to invest in a significant amount of IT development in the next 18 months to ensure their payroll and accounts payable systems are able to effectively communicate with each other.

How Will I Be Affected By IR35 As A Private Sector Employer?

With HMRC estimating that the cost to the private sector for non-compliance is going to increase from the £700 million seen in 2017/18, to an astonishing £1.2 billion in 2022/23, and that only 10% of contractors are currently compliant, there’s no escaping the fact that these changes are going to affect your business.

The extent to which you are affected will largely depend on how many contractors you have working for you at the time the legislation is introduced. If you’re using contractors as part of your team or workforce, there are a few ways you may be affected, but the big ones are:

  1. A skill shortage as a result of contractor talent leaving your company because it’s no longer lucrative for them to stay. This will create holes in your pool of talent.
  2. Rising costs as a result of the need to pay contractors more in order to keep them and avoid that skill gap. Over time the cost of paying contractors enough extra to cover their increased taxes really adds up and causes projects to go over budget.

It’s likely that contractors in the private sector will react in a similar manner to those in the public sector. After all, a lot of the ones currently operating in the private sphere were previously public operators who abandoned their existing pool of clients for private ones in 2017 when IR35 first kicked in.

The other X factor here is how things will be affected by Brexit and what changes will occur if/when the UK leaves the EU. There are existing issues relating to Brexit where overseas talent is concerned, and the changes to IR35 are only likely to exacerbate this issue.

Want to know more about IR35 now? There’s no need to wait, feel free to get in touch online or call us on 0333 023 0073 to discuss how the legislation will affect you.

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