- Exploration of IR35 and its application to the private sector, from April 2020
- Key actions to take in preparation for the Off-Payroll rules
April 2020 will see IR35 extended to the private sector and Off-Payroll rules will begin. Consequently, businesses could experience major disturbances unless the preparation begins immediately.
What is IR35?
Currently, limited company contractors are solely responsible for the determination of their IR35 employment status and are liable for all tax issues. The change in law makes the end-user client responsible for determining the IR35 employment status of the contractor for each assignment undertaken and the agency paying the limited company contractor responsible for tax liabilities.
How do the changes impact the private sector?
The cost of hiring contingent workers could increase significantly as workers are caught by the Off-Payroll rules and employment taxes need to be accounted for. The new rules could disturb current and future projects, cause issues sourcing talent and could impact the overall mobility and flexibility of workforce.
Where the assignment undertaken by the contractor means that they are effectively acting as an employee of the client, then the contractor will need to be paid through the PAYE payroll and paid net.
These are some of the impacts of the new rules and factors that should be considered by businesses now:
- Clients should assess the IR35 status of their contractors before April 2020 in order to avoid disruption.
- Off-Payroll rules will impose a new tax bill on businesses that have contractors assessed to be deemed employees.
- Existing contracts could be affected by the changes and may need to be re-negotiated.
- Businesses failing to address the new rules before the commencement date could face rapidly accelerating costs and damage to future and ongoing projects.
What does this mean for those affected?
The agency will need to make the required employee PAYE tax and National Insurance deductions from the gross pay rate and pay employer’s National Insurance and Apprenticeship Levy on the gross pay (14.3% cost).
The new rules may increase the cost of hiring those contractors deemed to be employees for tax purposes by 13.8% for employers NIC and an additional 0.5% for Apprenticeship Levy.
The new rules may also have an impact on other aspects of contractors’ tax affairs, for instance, their ability to claim for tax relief on expenses for items such as meals and overnight stays for work. Those affected contractors may look to negotiate a higher contract rate to offset these new rules. At this point, re-negotiation may be unavoidable.
Behavioural change is also likely in response to these new rules although these are unpredictable now due to the number of parties involved. Businesses wishing to retain the services of their current contractors may incur larger costs, which may result in budget deficits.
Downsizing may help to soften the impact, but of course, this brings new issues surrounding the capability and efficiency of projects and in turn, could result in a negative impact on productivity and profitability.
Here are some tips that can help you prepare for the implementation of IR35:
- Research and Identify.
- Consider contracts.
- Work out the costs.
- Protect the truly self-employed.
- Consider implementing new recruitment procedures
It’s vital that clients and agencies engage in early preparation for these new Off-Payroll rules to put themselves in the best possible position for when the new rules take effect from April 2020.