Are you ready for the changes to the tax rules applicable to independent contractors?
From 6 April next year, the tax rules applicable to independent contractors who provide their services through intermediaries (usually their own personal service company) are changing. The changes affect both hirers and independent contractors. Are you ready?
IR35 is a piece of tax legislation introduced in April 2000 designed to combat tax avoidance by individuals and hirers who engage an individual to provide their services via an intermediary such as a limited company, partnership or an agent.
The effect of IR35
The effect of IR35 is that if an individual is not a genuine contractor, freelancer, interim or consultant who is in business on his/her own account, s/he will be deemed to be an employee and subject to pay the PAYE tax and national insurance contributions paid by ordinary employees.
There are an estimated 1.3 million contractors in the UK and we all know someone who is a “contractor”. What you may or may not know is that they will be paying significantly less tax and national insurance contributions if they are providing their services via a personal service company or another intermediary.
Often contractors are doing pretty much the same jobs as employees but reaping the tax benefit of being self employed. HM Revenue & Customs has found it hard to enforce IR35 given the sheer number of contractors. For years, it has been losing out on tax and national insurance contributions but is now taking measures to stem the flow.
So what is changing?
From 6 April 2020, the responsibility for determining whether an individual is genuinely self employed will move away from a declaration by the individual to being the responsibility of the end user of the services and the fee payer.
What does this mean in practice?
What this means is that if you hire a contractor directly, or through an agency, your firm will be responsible for getting the assessment of the individual’s employed or self-employed status right.
End users have to issue a Status Determination Statement (“SDS”) to each individual contractor confirming their view of the individual’s status and why.
If you use an agency, you need to provide them with the correct information and pass on the SDS. If you are an agency you need to ensure that you have got the right information from the end user.
Potential negative impact
This not only adds to the administrative burden of using contractors but passes the risk to the hirer to get it right. If you get it wrong, your business may face a fine, a tax bill and potential damage to its reputation. Go too far the other way, in an attempt to mitigate those risks, and you may not be able to attract the talent your business needs.
When similar changes were made to the use of contractors in the public sector in 2017, the use of contractors fell off a cliff. In light of the changes coming in, many banks and financial institutions have already said they will no longer use IR35 contractors.
The impact of these changes in the private sector will be significant but a blanket ban may not be the right answer for your business, particularly if you want to retain and attract the most talented individuals.
Do the changes apply to all businesses?
Small companies (as defined in s.382 Companies Act 2006) and businesses with a turnover of less than £10.2M are exempt from the new legislation. So many SMEs will escape this change in the law and may feel that they can continue on as before.
However, if you are a fast growing business or are looking for a sale / exit, how you use contractors will be a concern for a potential purchaser. So you need to think carefully about IR35 and take action now.
If you are caught by IR35, whether as a business or a contractor whose status is or may be under challenge, now is the time to seek legal advice.
So what should my business do?
- Conduct an audit of all the contractors you use and how you use them. Stepping back, is there really that much of a difference between what they do and your permanent employees? If not, you will need to address this.
- Review the contracts your contractors are engaged upon. Are they consistent and fit for purpose?
- Review the guidelines, if any, your business has for engaging contractors to ensure a uniform approach that is compliant with the new rules and helps reduce the risk of contractors being deemed to be employees by HM Revenue & Customs.
This is a tricky area and it is important you get it right. If you would like to discuss this further, how you can mitigate the impact of the changes and help your business retain its talent, please do not hesitate to contact our IR35 experts Neil Johnston (tel: 020 7288 4742 or email NeilJohnston@BoltBurdon.co.uk) and Leanne Good (tel: 020 7288 4785 or email LeanneGood@BoltBurdon.co.uk).