How we got here

IR35 has been around for some time, since 2000 in fact. Its premise was a simple and well-intentioned one – to tackle tax avoidance through personal service companies (PSC). At the time, the Government explained:

“There has for some time been general concern about the hiring of individuals through their own service companies so that they can exploit the fiscal advantages offered by a corporate structure. It is possible for someone to leave work as an employee on a Friday, only to return the following Monday to do exactly the same job as an indirectly engaged ‘consultant’ paying substantially reduced tax and national insurance. The aim of the proposed changes is to ensure that people working in what is, in effect, disguised employment will, in practice, pay the same tax and national insurance as someone employed directly.”

The rationale for reforming existing legislation is to stop those performing ‘employee-like’ work via an intermediary (PSC) from paying less income tax and National Insurance Contributions than they would if they were an employee. This, the Government said, would essentially eradicate what it considers to be tax avoidance and potentially generate an additional £440 million in what it deemed to have been ‘lost’ revenues.

However, by 2010, the Government conceded that revenues generated by the legislation had fallen substantially short of expectations. The change created all manner of confusion, with many public sector contractors soon finding themselves outside IR35.

This meant they were categorised as operating like a ‘business’ rather than an ‘employee’, as had previously been the case.. In 2017, the decision was then taken to extend this to include legislation into the private sector contractors too.

Reaction to changes

It is fair to say that concerns were raised when the extension to IR35 was announced, with the last two years dominated by consultations between various groups and the Government.

There were calls for a delay in the reforms, while many others lobbied for the establishment of an independent appeals process to counter what many have dubbed to be an inadequate online status checker – Check Employment Status for Tax (CEST). But although the Government has acknowledged the concerns raised, they have by large been overlooked. So, what does this mean?
Implications for IT contractors

Under the expanded regulations, the responsibility for conducting checks on whether contractors have paid the right amount of income tax and national insurance contributions will now shift from the contractor to either the end client or the agency using their services.

So, if the contractor is deemed as ‘employed’, HMRC will consider the arrangement between them and the hirer as employment, where the invoice issued and subsequently paid is treated as the salary of the contractor. As such, once VAT and allowed expenses are set aside, the net figure will be subject to PAYE and NIC deductions.

The changes are set to affect 170,000 contractors who currently operate through their own company, and as many as 60,000 clients that utilise their services which are employed via a PSC. HMRC estimates that the cost of non-compliance is set to rise to £1.3 billion by 2023, with the Government hoping to collect an estimated £3.1 billion between 2020 and 2024 as a result of these new measures.

Unsurprisingly, HMRC is determined to ensure that all businesses entering into an agreement with a contractor assess the services being requested and determine if the contract is ‘inside’ or ‘outside’ IR35 . If an incorrect assessment is made, and therefore there is a tax contribution deficit, then HMRC will pursue the agency or end client for the difference.

Navigating your way through IR35 can be challenging. If you are looking for advice and guidance on how the new changes may impact you in your contractor career, get in touch with us today and we can talk you through it. We also have a dedicated hub containing frequently asked questions and information on IR35 for both clients and contractors.

The post Finance Bill Reform: IR35 in the Private sector, are you ready? appeared first on La Fosse.

What is IR35?

IR35 legislation began in 2000. It essentially states that when a contractor provides their services via a personal service company (“PSC”), there are tests in place to determine whether or not the contractor would be deemed to be an employee, were it not for the existence of the PSC.

Inside? If the contractor would be deemed to be an employee but for the PSC, then the PSC must tax its income in a manner similar to employment income. A genuinely independent contractor is likely to be considered ‘outside IR35.’

So what are the reforms?

Traditionally, contractors working via their limited companies have been responsible for determining their own employment status.

But the IR35 reforms already introduced in the public sector have shifted the responsibility from the contractor to the client or hirer. If the client or hirer gets that decision wrong, the liability for any missing tax sits with them.

Who does it affect?

Currently it affects only the public sector. The proposed change is to make this applicable across all industries and sectors for any temporary or contract workers.

How will it affect Contractors:

If your engagement is inside the scope of IR35, then your agency or client will be responsible for paying you net of PAYE tax regardless of whether you operate through a limited company.

How will it affect Businesses:

If you have a large population of contractors in your business, you may encounter unrest and uncertainty around the turn of the tax year as people establish whether their engagement is classified as being inside or outside of the scope of the new legislation.

With the shift of responsibility from the contractor to the client or hirer, you will need to make a judgement call on where your contractors sit in relation to IR35.

What steps businesses can be taking now to prepare:

• You will need to determine whether your contractor’s status is within or outside of IR35, so it would be good to familiarise yourself now and start making these assessments ahead of time.
• HMRC have an online tool to help determine whether the contractor is within or outside IR35.

We hosted a breakfast round-table event for private sector hiring managers, sharing insight around the possible implications of IR35 for their business, and provided an open forum to discuss hiring strategies should the legislation move forwards.

For more information visit our IR35 hub.

Learn more about our private equity specialism.

The post IR35 in the Private sector: What you need to know appeared first on La Fosse.

What is IR35?

IR35 legislation began in 2000. It essentially states that when a contractor provides their services via a personal service company (“PSC”), there are tests in place to determine whether or not the contractor would be deemed to be an employee, were it not for the existence of the PSC.

Inside? If the contractor would be deemed to be an employee but for the PSC, then the PSC must tax its income in a manner similar to employment income. A genuinely independent contractor is likely to be considered ‘outside IR35.’

So what are the reforms?

Traditionally, contractors working via their limited companies have been responsible for determining their own employment status.

But the IR35 reforms already introduced in the public sector have shifted the responsibility from the contractor to the client or hirer. If the client or hirer gets that decision wrong, the liability for any missing tax sits with them.

Who does it affect?

Currently it affects only the public sector. The proposed change is to make this applicable across all industries and sectors for any temporary or contract workers.

How will it affect Contractors:

If your engagement is inside the scope of IR35, then your agency or client will be responsible for paying you net of PAYE tax regardless of whether you operate through a limited company.

How will it affect Businesses:

If you have a large population of contractors in your business, you may encounter unrest and uncertainty around the turn of the tax year as people establish whether their engagement is classified as being inside or outside of the scope of the new legislation.

With the shift of responsibility from the contractor to the client or hirer, you will need to make a judgement call on where your contractors sit in relation to IR35.

What steps businesses can be taking now to prepare:

• You will need to determine whether your contractor’s status is within or outside of IR35, so it would be good to familiarise yourself now and start making these assessments ahead of time.
• HMRC have an online tool to help determine whether the contractor is within or outside IR35.

We hosted a breakfast round-table event for private sector hiring managers, sharing insight around the possible implications of IR35 for their business, and provided an open forum to discuss hiring strategies should the legislation move forwards.

For more information visit our IR35 hub.

Learn more about our private equity specialism.

The post IR35 in the Private Sector: What you need to know appeared first on La Fosse.