IR35 news: IR35 changes finally come into force

Roughly 60,000 businesses and 500,000 contractors must now adhere to the long-dreaded extension of off-payroll working rules

IR35 at a glance

IR35 is a piece of legislation designed to tackle tax avoidance from 'disguised employment' where self-employed contractors set up limited companies to pay themselves through dividends, which are not subject to National Insurance.

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It was first introduced in 1999 by then-chancellor Gordon Brown. However, as part of the November 2016 Autumn Statement, current chancellor Phillip Hammond said that public bodies using contractors would be responsible for IR35 enforcement from 6 April 2017.

It's thought that contractors could lose up to 25% of their money with IR35, according to ContractorCalculator, and as a result, almost 85% said they would consider leaving the public sector to work for private companies instead, according to a recent Qdos Contractor's survey.

The IR35 definitions are a little fuzzy, but if you work onsite with your client, who also manages you and supplies your equipment, and if you lead a team of employees that work for the client, IR35 will most likely hit you.

This is particularly worrying for government and public bodies, as they rely heavily on IT contractors, and many of those resources would be put at risk with the IR35 rules.

Head to our What is IR35? page for a detailed breakdown of the legislation.

Latest news: IR35 changes finally come into force

The extension of contentious off-payroll working regulations from the public sector to private sector companies has come into force today following years of back and forth debate, tweaks to the legislation, and delays.

From 6 April 2021, businesses must determine whether their contractors work regularly enough to fall within the scope of IR35. The rules are due to affect roughly 60,000 businesses, 20,000 agencies and 500,000 contractors across the UK. 

The extension of the IR35 rules was due to come into force in April 2020, but was delayed due to the disruptive effects of COVID-19. The government had planned to review the changes during the 2019 election but decided to plough ahead before the pandemic delayed the rollout.

Businesses and workers have a year to adjust to the off-payroll working rules, during which HMRC won’t pursue penalties for violations. Instead, it would take a ‘light touch’ approach to enforcement to give everybody the space to get their determinations right.

HMRC introduced IR35 tax legislation in 2000 to crack down on tax avoidance schemes based on the way that contractors establish limited companies to reduce their tax liability and national insurance contributions.

Companies benefit from certain loopholes, such as the ability to pay ‘directors’ or ‘employees’ in dividends with lower rates compared to salaries. IR35 rules aim to prevent this practice in situations where contractors would engage in work that’s equivalent to full-time employment. 

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The rules stipulate that all public sector employers, as well as medium and large-sized businesses, must determine whether contractors fall within the scope of IR35, and thus be processed as employees are. A worker’s intermediary must make this determination if they’re providing services to a small private sector company. 

Businesses and contractors have long dreaded these rules being extended into the private sector, critiquing not only the implementation of the rollout but the principles too. Contractors who fall within IR35, for example, must pay the same tax and national insurance contributions as their employed counterparts, but don’t benefit from the same benefits including sick pay and holiday pay.

CEO of ContractorCalculator and IR35 Shield, Dave Chaplin, said hirers have had years to get ready for the rules, but many have left it until the last minute. Research published in January showed more than half of in-work contractors were yet to be assessed for IR35, with 23% of firms bypassing the need for checks by imposing a blanket ban on limited company contractors.

“However,” he said, “the dust will settle and businesses will soon recognise the Off-Payroll bogeyman for what it is. Once some begin to test the water by engaging limited company contractors, others will undoubtedly follow, not least because the flexible workforce is the bedrock of UK PLC and the UK economy.

“Contractors provide vital skills on an ‘as needs’ basis and once businesses overcome any overly heightened fears they have, they will turn to limited company contractors again as they recognise the practical and commercial benefits they bring. I would urge contractors to hold their nerve and for those hirers who are not prepared, it may be prudent to terminate or pause any existing contracts with contingent workers immediately and then start assessing them before they continue their work.”

Head of legal services at Brookson Legal, Matt Fryer, meanwhile, has agreed that blanket bans aren’t sustainable, and those organisations should consider implementing the correct processes to allow them to gain access to contractors. He suggested that 6 April isn’t the end of the IR35 journey - but simply the beginning of the process. 

“As IR35 becomes the norm, businesses need to take a completely new approach to contingent workforce management,” Fryer said. 

“Processes need to be embedded throughout the company to ensure continuity, including undertaking a fair and accurate employment status test, managing the process of any challenges to status determinations, contract migration and recruitment. It is also vital to maintain visibility of the temporary workforce and control of risk throughout the supply chain.

“With the economy gearing up for recovery from the pandemic, not having an appropriate IR35 solution in place is a real risk in terms of attracting and retaining a highly-talented flexible workforce. However, it is not too late for businesses who have yet to put in place an effective IR35 solution. By seeking expert support now, the wheels can be put in motion to help avoid skills shortages, compliance issues further down the line, surprise tax bills and HMRC fines.”

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More on IR35

The IT Pro Podcast: IR35 - what happens now?
3 Apr 2020

The IT Pro Podcast: IR35 - what happens now?

With the legislation now delayed until next year, where does this leave contractors and their employers?