Is IR35 the death of contracting?

Today the government will unveil its first Budget amid continued pressure from the coronavirus. The new Chancellor, Rishi Sunak, will present the fiscal plans in the Commons at 12:30 GMT, less than a month after taking over the Treasury.

Announcing IR35 changes

Some elements have already been revealed, including more than £600bn for infrastructure projects over five years and extra money for potholes. And while much of the focus has been on the tearing up of Treasury rules and measures to try and ‘level up’ the rest of the country, there are several tax changes in the works that will be – or could be – unveiled.

The changes to IR35 are expected to be one of the key tax announcements. The government plans to introduce new legislation from April 2020 to help tackle the perceived abuse of tax and national insurance contributions relating to off-payroll labour in the private sector.

Employment groups representing self-employed contractors’ interests have repeatedly urged the government to suspend the IR35 updates, claiming a risk to the economy. Industry bodies argue that the changes, due to come into effect in April, will lead to a third of self-employed contractors stopping freelancing over non-compliance fears.

But what is IR35, when will it apply, and is it the death of contracting?

What is IR35?

IR35 was introduced on the 6th of April in 2000 and has seen several expansions since. In a nutshell, IR35 is the piece of legislation that allows HMRC ‘to collect additional payment where a contractor is an employee in all but name’.

The expansion of IR35 to include medium and large organisations in all sectors was announced in October 2018. It was met with a strong response by Barclays, Lloyds and RBS who all stated that they would no longer engage contractors who operate via limited companies. This decision shows that some organisations aren’t willing to manage contractors under the new rules, fuelled by a persistent uncertainty about how the reforms will work in practice.

A report by Brookson Legal found that UK businesses are at risk of a ‘significant talent drain’ if they don’t prepare for the IR35 changes in the private sector. So while blanket bans of contracting have been the kneejerk reaction of some organisations, this approach won’t benefit everyone.

When will IR35 apply?

If a contractor is operating through an intermediary, such as a limited company, and but for that intermediary they would be an employee of their client, IR35 kicks in.

HMRC’s online IR35 tool – the Check Employment Status for Tax (CEST) tool asks a series of questions about the nature of a contractor’s engagement and will allow you to determine their IR35 status based on the answers given.

It is worth noting that the off-payroll IR35 rules will not apply to ‘small companies’ from April 2020. After some initial confusion as to what definition of ‘small company’ the government will operate with, it has since confirmed that it will use the same criteria outlined in the Companies Act of 2006. That means that during a 12-month period, a business is deemed to be a ‘small’ company if it meets two or more of the following criteria:

  • Turnover – not more than £10.2 million
  • Balance sheet total – not more than 5.1 million
  • Number of employees – not more than 50

Will IR35 be the end of contracting?

No, but teething issues are expected. One lingering criticism is the poor rollout of public sector IR35 changes in April of 2017, as early indications suggest difficulties. This view has been enforced by the existing economic challenges facing the UK.

Despite the complications regarding small companies and some lingering uncertainty around how businesses can prepare for the changes, all indications suggest the legislation will go live in April as planned.

Just IT Recruitment’s payroll partner, Granite, have created a guide to IR35 and implications of the changes to it.

If you’re still in doubt about how IR35 affects you, either as a contractor, or as an employer, then contact our team: