The Treasury has confirmed plans to roll-out changes to off-payroll working rules known as IR35 in the private sector will go ahead – but promises a ‘light touch approach’ for the first year.
The IR35 rules were introduced in 2000 to ensure that someone working like an employee but via a Personal Services Company (PSC), is paying similar levels of tax to other employees. You fall ‘inside’ IR35 rules for tax purposes if you would be considered an employee of the company if the PSC wasn’t in place.
In the past, it was up to contractors to determine if they fell inside IR35 rules. In 2017, the responsibility in the public sector was shifted to the organisation – and the private sector is up next. It’s estimated that non-compliance is set to cost the Exchequer more than £1.3bn a year by 2023-24 if it’s not addressed.
Here, we explain what the IR35 changes for the private sector are, who may be affected and how to make sure you’re compliant.
What IR35 changes have been announced?
The Treasury’s recent review of off-payroll working rules was taken after criticisms over the adverse effect the changes could have on both businesses and freelancers.
However, while the review admits that the reform will be a ‘major change’, it confirms it will go ahead nonetheless – but a number of alterations have been made to help organisations and contractors prepare. These include:
- There will be a ‘light touch approach’ HMRC has been told not to place penalties on anyone with inaccuracies relating to off-payroll working rules during the first year of the roll-out. However, anyone who deliberately fails to comply can still be charged.
- Information won’t be used for new investigations It’s been confirmed that HMRC won’t use any information submitted as a result of the changes to launch new investigations into PSCs for tax years before 6 April 2020, unless there’s reason to suspect fraud or criminal behaviour.
- Rules only apply for services after 6 April 2020 IR35 changes will now only apply to work carried out on or after 6 April 2020. Previously, the changes were going to take in any work or payments received on or after 6 April, so this gives workers and businesses alike more time to prepare.
- Clients will be legally obligated to supply information The government will place a legal obligation on clients that means they must respond to requests of information about their size from agencies or workers – this addresses the fact that IR3 is due to affect mainly medium and large organisations, which are categorised as having at least 50 employees.
What hasn’t changed is the burden of deciding whether or not a worker is IR35-compliant will shift to the organisation contracting the work, rather than the worker themselves.
Companies will need to tighten up their hiring practices and contractors may increasingly see themselves classified as within IR35.
Who could be affected by the IR35 rollout?
Many contractors offer work to clients by setting up their own PSC. The client then hires the PSC, which in turn pays the contractor.
However, HMRC believes thousands of people working under these arrangements should actually be paying the same tax as employees.
There are three main groups of workers who are likely to be affected by these rules:
- Up to 170,000 individuals supplying services through an intermediary, such as a PSC, who would otherwise be fully employed.
- Up to 60,000 medium and large organisations (with 50 or more employees) working in the private sector, which hire individual workers via PSCs.
- Around 20,000 recruitment agencies and other intermediaries which supply staff through PSCs.
IR35 and the self-employed
The government says that genuine freelancers and self-employed workers won’t be affected. However, during a consultation into IR35 that ran between 5 March and 28 May 2019, it received more than 200 responses from various industry bodies.
One organisation estimated that 90% of the 170,000 affected contractors could stand to lose up to 20% of their income as a result of the changes.
That’s because freelancers, as self-employed workers, would usually only be taxed on their profits, not their full earnings.
Self-employed workers also pay different rates of National Insurance and employers don’t pay a contribution for self-employed contractors.
If considered to be inside IR35, both self-employed workers and their employers will have to pay more tax.
Other concerns included the unknown impacts of Brexit on UK business and that many businesses would need more time to alter their payroll and tax systems.
- Find out more: the taxes you pay as a small business
What is IR35?
The off-payroll working rules seek to ensure that everyone working for a company pays income tax and National Insurance contributions (NICs), regardless of whether they’re employed directly or via a PSC.
The IR35 rules will apply if you would be considered an employee of the company if the PSC wasn’t in place.
If you’re not sure whether or not you, or someone you employ, would fall inside of IR35, there are three main ‘tests’ you can use to check:
- Do you have control over how the work is completed? This refers to being able to decide your working hours or the location of where the work is carried out. If the choice isn’t down to you, it’s likely that you will be inside of IR35.
- Is there a mutuality of obligations? If the company you’re working for is obliged to give you more work once you’ve finished a task, you may be inside of IR35.
- Do you personally have to complete the work you do? To be outside of IR35, there should be a substitution clause in your contract – and you should be in control of the substitute.
If the IR35 rules apply, companies will have to deduct the relevant employment taxes and NICs from the person’s pay.
- Find out more: use our income tax calculator to work out your bill