IR35 introduced to stop abuse
The IR35 rules first came into force with the Finance Act 2000 with the aim of preventing contractors from avoiding paying their dues by drawing a tax-free salary from a company structure which they had created for that precise purpose. According to HMRC, someone earning £100,000 over the period of a year would on average pay around £34,000 in employment taxes. By not complying with IR35, that person could create a structure where they only pay £13,000.
IR35 and the public sector
Responsibility now lies with the public hiring organisation to determine the worker’s status for tax purposes.
Changes to the IR35 regulations have already cut the pay of numerous contractors, with many deciding to avoid working in the public sector. Changes to IR35 came into force in April 2017, which resulted in public sector contractors being taxed directly for more assignments.
The Finance Act 2017 introduced reforms to how the off-payroll rules operate in the public sector from 6 April 2017. The controversial changes saw the responsibility for establishing whether the IR35 rules apply to each assignment moving to the public sector organisation hiring them. It became the client or hiring organisations responsibility to determine whether people who are ‘self-employed’ should be classed as employees for tax paying purposes. This change in responsibility has led to more organisations becoming reluctant to classify workers as external contractors. If the organisation determines that IR35 applies to the assignment, they must deduct tax and NICs from contractors’ pay at source, rather than allowing them to defer and claim expenses. HMRC maintains that workers are only required to pay tax that’s due.
IR35 and the private sector
In May 2018, HMRC announced its long-awaited consultation on extending off-payroll working reform to the private sector. Here’s what contractors need to know; many industry experts believe that recent changes to the public sector were merely a dry run for a far greater, more lucrative target for the government; ie. the private sector. The consensus is that private sector IR35 changes are imminent. Most expect to see the amendments rolled out within two years. Only the ongoing post-Brexit uncertainty and the current fragile position of the government lessens the likelihood of the date of implementation going beyond 2019.
IR35 and Brexit
Is the Government set for a backlash? To say the prospect of tax changes to the private sector is unpopular is an understatement. PRISM is the trade body representing umbrella companies. Its CEO, Crawford Temple, believes that an extension would be “a complete disaster”. As EU exit negotiations begin, the UK’s attractiveness as a business location is crucial. Extending the tax changes to the private sector could seriously undermine this. HMRC has recently lost cases on employment status in respect IR35 which further undermined them and their popularity. HMRC’s recently launched consultation document means that you can respond and ask questions up to 10 August 2018.
Further help with off-payroll working rules
If you are in the private sector and aren’t sure if the IR35 rule applies, you can use HMRC’s ‘check employment for tax service’ contract review service and for further advice you can contact the IR35 Helpline.