IR35 came into force in 2000 to make sure that contractors weren’t avoiding paying tax on the work that they did. The rules already apply to the public sector, but they are coming into force for the private sector in 2020. We’ll look at what this means for contractors and the businesses who use them.
What is IR35?
IR35 are tax laws that help prevent tax avoidance. The purpose of these laws is to stop contractors or freelancers offering their services using an intermediary, namely a limited company, so they can pay less tax, even though they are working as a full-time employee. Under a limited company, the money they make comes from a salary and dividends from their company, and this is taxed at a lower rate compared to full-time employment. IR35 ensures that these workers pay a similar amount of tax to a full-time member of staff if they are inside IR35 rules. These rules were previously enforced in the public sector in 2017, but they are now coming into force in the private sector in 2020.
What are the changes to IR35 and when will they happen?
From 6 April 2020, the IR35’s ‘off-payroll’ rules will apply to contractors who work through intermediaries, most likely limited companies, and those that hire them. Before this date, the intermediary determines their employment status and if they fall inside IR35. After 6 April 2020, all medium- and large-sized private sector companies will need to decide if a contractor or freelancer is inside or outside of IR35. However, contractors are still responsible for identifying their own IR35 status if they work with small companies, as small companies are exempt. What this means is that responsibility will move from the contractor to the client to determine a worker’s IR35 status.
If you’re inside IR35:
You’re seen as an employee for tax purposes.
You’ll pay National Insurance Contributions (NICs) and Income Tax like a full-time employee.
The company that has employed you will deduct NICs and Income Tax from the fee they are paying you.
If you’re outside IR35:
You’ll pay tax through your salary and company dividends.
You need to make sure your tax deductions are correct.
What impact could these changes have on professional services?
IR35 rules could have an impact on how companies use freelancers and contractors as well as the contractors themselves.
Some businesses may want to cut ties with contractors to make sure they are compliant instead of trying to determine someone’s IR35 status. One report suggests that up to 20% of businesses have already done this, so companies may not use contractors or freelancers in the future. For those who are legitimately using a limited company, it might lead to less work, or they may have their self-employment status questioned. If a contractor or freelancer does fall inside IR35, while they pay tax like an employee, they do not get the same benefits. This includes things like sick pay and holiday pay.
It may make more sense for contractors and freelancers to go into full-time employment so they are not affected by the negative aspects of IR35, such as lack of employee benefits. This could lead to a shortage of contractors and freelancers, so businesses may need to turn to companies like us at illumo digital, to hire talented people for projects.
IR35 is a big change for companies and workers, and it will take time to see its impact after 6 April 2020. It’s important to get advice from your accountant or the HMRC if you’re having trouble determining your status, or if you disagree with the decision of a company that you work with.
If you would like to enquire about how we might work with you on a specific project, please get in touch. We would be happy to chat through what you are looking to achieve.Let’s talk