What IR35 means for UK businesses that use contractors

Upcoming changes to the off-payroll working rules for clients, workers and their intermediaries are likely to cause serious disruption to temporary contract workers and their clients across the UK. We take an in-depth look at what the changes are and what businesses can do to make sure they have the flexible workforce they need to remain productive.

What is IR35?

There have been a lot of discussions recently about the upcoming changes to the IR35 legislation but IR35 has actually been in effect since 1999. The main difference is that currently the responsibility for determining if contractors are working as an effective employee - whether they are working inside or outside IR35 - lies with the contractor.

The aim of the legislation is to tackle perceived unfairness in the way individuals are taxed depending upon whether they are a permanent employee of a company or a contractor working through their own limited company. 

When do the latest changes come into effect?

The latest changes to the IR35 legislation come into effect on the 6th of April 2020. 

In the run-up to the 2019 general election, all of the major parties have promised to review the legislation. Since the election, the government has started a review to look at the implementation which means that it is probably going ahead as scheduled.

We recognise that concerns have been raised about the forthcoming reforms to the off-payroll working rules. The purpose of this consultation is to make sure that the implementation of these changes in April is as smooth as possible. - Jesse Norman (Financial Secretary to the Treasury)

With similar legislation appearing in other countries, it looks like IR35 is here to stay.

How will it affect contractors?

If a contractor is found to be working as an effective employee of a client, then HMRC requires that invoices sent from the contractors company be treated as if they were the contractor's personal income with tax, national insurance and employer national insurance (paid by the end-client company) to be deducted at source. 

This change means that contractors who take the majority of their company income as personal income will see (perhaps fairly) their tax bill increase. Many contractors have said they will refuse to work on roles inside IR35 while others intend to increase their daily rates to compensate for any losses.

For those contractors who treat their business as their employer - taking a small regular salary, paying corporation tax, employer national insurance, company insurances, employee training, employee holiday and sick pay and saving company money for future expansion will see their company income reduced to zero.

Any hopes of entrepreneurship are effectively killed before they get off the ground.

How will it affect businesses?

Responsibility for determining whether a contractor is inside or outside IR35 will be transferred to the end-client company. 

Liability for incorrectly determining a contractor as outside IR35 will also lie with the contractor's client company (most often an agency or resource provider). Many large businesses in the UK that make heavy use of contract workers (particularly in the banking sector) have either started implementing blanket bans on contractors, forcing contractors to become permanent employees or making contract workers work under external umbrella companies.

While this goes against the intention of the legislation, it's difficult to blame end-client companies as hiring contractors outside of IR35 looks like a high-risk strategy, especially with the vague way in which the legislation is defined.

What is going to happen?

It's difficult to say exactly what is going to happen, but the general consensus is that it won't be good for the British economy. Anything that makes Britain a less attractive location to set up businesses and hire people as and when you need them can only be doing damage.

Many talented contractors come to Britain from abroad to work in IT, healthcare, education, construction, energy, transport, engineering and many other industries. This legislation is likely to make them look elsewhere making finding an effective and flexible workforce much more difficult for UK businesses.

What options are there for businesses?

With just weeks left before the IR35 changes come into effect, it's crucial that your business has a solid plan. Here are some options that your business may consider:

Contractors go permanent

This approach will work with a small number of contractors, however they're likely to resent the move. The chance are your new employee will move on at the first opportunity. The majority of contractors have stated that they'll look for a role that falls outside IR35 or even move abroad to find work.

Contractors work inside IR35

Some contractors may agree to work inside IR35 or for an umbrella company (effectively inside IR35 with additional management charges by the umbrella company). However, contractors will probably want to see an increase in their daily rates to compensate for losses. 

It's possible that the end-client company may end up having to provide holiday and sick pay as well as maternity/paternity pay and other benefits.

Outsourcing for businesses

There are options to outsource your projects either off-shore or within the UK. Outsourcing off-shore can be cheaper but communication issues, cultural differences, time zones and the reliability of the company you choose can all be potential risks that may take time to show up leading to your company missing deadlines, getting a sub-standard product and/or service while still costing money.

There are outsourcing options in the UK, including the big players such as Capita, Accenture, Capgemini (although they may ultimately outsource their projects to off-shore subsidiaries). Due to their size, their pricing may well be out of many company's budgets.

Smaller software development companies in the UK (such as Anterec where I work) can help fill the gap with permanent, UK-based software developer and test teams. We focus on providing highly-skilled software developers and commit to providing regular cutting-edge training for our staff to make sure we stay ahead of the competition. 

If you're worried about the impact of IR35 on your business, get in touch with us and we can discuss how we can help your business deliver its software projects on time and on budget.

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