IR35 reforms: what you need to knowExtra money for Brexit and the NHS, changes to growth and debt forecasts, changes to tax thresholds and a new ‘digital services tax’. These have been the points which have received the most media attention from the autumn Budget. Another important announcement, however, has predominantly slipped under the media radar and failed to become a major ‘talking point’ from the new budget. Hammond announced an IR35 tax clampdown that will have a huge affect on contractors and freelancers who operate in the private sector. Rules which already apply to the public sector will be extended to the private sector in 2020, with the exception of small businesses.
The reforms mean that self employed people could end up paying more tax.
Private sector companies with over 250 employees will now have an obligation to check whether they are using any contractors who should be paying tax. The aim of these changes is to clamp down on self employed workers who should really be treated as employees, but work through a third party.
In reality, these changes don’t mean that IR35 is being applied to the private sector for the first time. Rather, it just means that the burden of responsibility to pay the right amount tax shifts from the subcontractor to the company.
In the private sector, relationships with freelancers are generally more complex than in the public sector where the rules already apply. There are fears that the changes will have a negative impact on genuinely independent contractors.
The new IR35 rules could reduce a subcontractor’s annual income by as much as 25% when extra income and National Insurance contributions are taken into account.
What’s more, some subcontractors are worried that the changes will deter public sector firms from employing them. They think that the risk of facing a large tax bill at a later date will prevent firms employing freelancers, even if it is just for genuine sub-contractual work. The fact remains that employers could face serious consequences if they misidentify a worker as an employee or self employed.
The Treasury estimates that the change in rules will earn the taxpayer an extra £1.2 billion by 2023. An extra £410 million has already been raised since rules were introduced in the public sector in April 2017. This is a similar figure to the amount that the new ‘digital services tax’ is expected to raise.
IR35 reforms: what you need to know
Wednesday, August 21st, 2019Changes to IR35 legislation are coming into effect in April 2020. IR35 legislation is designed to target “disguised employment” between firms and freelancers. This is where a company hires freelancers and contractors to undertake work, yet they are effectively employees of the company. It also affects freelancers who operate as sole traders or limited companies. The change in 2020 shifts the onus onto employers in relation to proving the contractor’s self-employed status.
Who will be hit the most by the IR35 changes?
Many industries rely heavily on freelance workers. The trade off is simple – the more freelancers operating in a sector, the heavier the effect. In a document published in 2018, HMRC predicted that 90% of freelancers who fall within IR35 are not complying with the existing IR35 rules. It’s clear that from April 2020, private sector businesses will need to do more to comply with the legislation.
What are the critics saying?
The general view is that the reforms will increase burdens and costs on businesses during a time of uncertainty and change, whilst also having to comply with many other acts of legislation that are evolving in all areas.
The fact that HMRC have lost a number of tax tribunal cases surrounding IR35 also illustrates the point that there is a possibility for different conclusions to be reached on the same facts and for tribunals to even take opposing views against HMRC.
So, as we can see, the influences of IR35 are not quite as definitive as HMRC would like.
How can a firm protect themselves?
HMRC has a tool named CEST that determines whether an individual should be classed as employed or self-employed for tax purposes although concerns have been raised around the tool due to its rate of accuracy. HMRC says that the tool arrives to a conclusion 85% of the time, leaving 15% of cases pending further investigation.
There has even been debate between HMRC and professionals around the validity of those percentages. This is further highlighted by a number of high profile cases involving television hosts and broadcastersthat have gone against HMRC.
Here are a few extra tips to make sure your firm is compliant:
With over 1.4 million British freelancers working across all sectors, IR35 is set to affect many working relationships all over the country. Making sure your firm is compliant with the changing legislation is critical to avoiding any HMRC investigations.
For more expertise on changing legislation in the world of tax, don’t hesitate to get in contact. We’re here to help.
Tags: IR35
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