The off-payroll legislation, also known as IR35, is government legislation designed to ensure contractors operating under Personal Service Companies (PSCs), who would otherwise be classed as employees, are paying broadly the same tax as employed workers. This legislation is due to hit the UK private sector from April 2020, so if you haven’t already heard about it, I would urge you to read on.
What does it all mean? If a contractor is assessed as ‘inside’ IR35 regulations, this means they are effectively doing the same role as an employee, and the government deem that they should therefore pay a similar amount of tax as said employee would. This means ‘genuine’ contractors should still be classed as ‘outside’ regulations and their tax status will remain unaffected.
Responsibility to assess PSC roles lies with the engager/client. If this is not undertaken properly, without reasonable care, you could risk significant tax liability.
IR35 reforms for the public sector were launched in 2017, and have - in the eyes of HMRC - proven successful, creating a claimed £425m in tax revenue. They expect the enforced changes will bring an additional £725m in tax revenue from the private sector.
It’s clear that the aim of the legislation is to help combat the existing imbalance between public and private sector businesses, and remove the challenges that public sector organisations face with struggling to compete with contractor attraction.
While the full extent of the new legislation on the sector remains unknown, it’s estimated that contractors found ‘inside’ IR35 will see a 15%-40% reduction in take-home pay - including how tax is applied and the removal of tax relief for travel and subsistence. With this we would expect to see PSC contractors seeking to increase day rates to ensure take-home pay stays broadly the same.
In addition, if contractors are found to be ‘inside’ IR35, employers National Insurance Contribution and legislative costs such as the apprenticeship levy, will also become payable. Many clients will expect the contractor to bare these costs as well, in a reduced rate, seeing this as the contractor’s tax liability. This was certainly the case when the public sector changes came in.
Some businesses may choose to increase pay to retain contractors and bear the cost of these increases. For those who aren’t able to pay more, they may be at risk of being unable to retain skilled contractors and thus could experience a talent loss – not a good prospect for any growing company.
The impact of this new legislation on all UK businesses is substantial, new processes, policies and system updates need to be implemented and managed.
Need further guidance on preparing for IR35? Contact one of our specialist consultants now.