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.
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:
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.
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:
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.
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.
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:
If the IR35 rules apply, companies will have to deduct the relevant employment taxes and NICs from the person's pay.