An IR35 U-turn
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The government has launched a review into IR35, promised by Sajid Javid in the run-up to the election. What does this mean for your clients – and your practice?
The changes to the IR35 rules – which would see most contractors taxed as employees have created an uproar among those affected, who saw the tax advantages of being a contractor being stolen away, with none of the compensatory benefits – pensions, sick pay and holiday entitlement – enjoyed by salaried staff by way of compensation.
What is happening?
On 6 April 2020, IR35 rules, which currently apply to the public sector, come into force in the private sector.
They determine whether a contractor, freelancer or casual worker is actually an employee, and so subject to PAYE and NI deductions.
The move has been seen as necessary to reflect the growth of the gig economy and to claw back some of the tax revenues that HMRC was missing out on.
This could mean take-home pay cut by around a third for many contractors.
The new rules will see companies responsible for assessing whether a contractor should be considered a full-time employee in the eyes of HMRC – causing headaches for employers and contractors alike. There are penalties for getting the wrong answer – and rather than rely on the government’s online CEST tool, many employers may ban the hiring of contractors, afraid that the new IR35 rules will make it too costly and time-consuming. GlaxoSmithKline has reportedly already ordered 1,500 contractors to sign on as PAYE staff.
The off-payroll working rules have in fact been in place for nearly 20 years. They are designed to ensure that individuals working through their own limited company pay, broadly, the same tax and National Insurance contributions (NICs) as those who are employed directly. The new initiative means that the loopholes which made contracting so very lucrative have been closed.
The new rules have already been imposed on those working on government and local authority contracts. Many contractors in the public sector, where stricter rules about off-payroll working have already become the norm, have already gone back into full employment, but the introduction of the new rules at the beginning of the new tax year to the private sector look more problematic.
Many contractors serving the public sector have already increased their rates to compensate for the effective cut in their takehome pay from the new tax regime. Those working in the private sector looked set to do the same – increasing costs for industry at a time when margins may already be tight.
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What is the government doing?
The government has launched a review of the new off-payroll working rules. The review will gather information from affected individuals and businesses, with the government saying it aims to address any concerns about how the IR35 rules will be implemented.
Chancellor Sajid Javid made a firm commitment to launch a review into IR35 in the run-up to the December election, saying: “I want to make sure that the proposed changes are right to take forward. We’ve already said that we’re on the side of self-employed people. We will be having a review and I think it makes sense to include IR35 in that review.”
The review will come as welcome news to contractors who would be most affected. But the scope of the review may be a blow to those who had hoped that the government might consider repealing IR35.
A petition requesting the government does so received over 30,000 signatures – but was met with a stonewall response. The review seems to be focused on the implementation of the reforms rather than the reforms themselves – and industry observers have suggested that the review is simply the government paying lip-service to election promises.
The review is set to determine if any further steps can be taken to implement the reforms. A separate review will assess what is needed to ensure that the self-employed, who are not within the scope of IR35 rules, are not impacted. The government has said that it will include a series of roundtables with stakeholders who will be affected by the reforms, including contractor groups and medium to large-sized business.
The government also committed to an evaluation of the enhanced Check Employment Status for Tax (CEST), which was updated in November. Preliminary reports suggest that CEST is now more reliable and can provide an answer in more than 85% of cases.
It looks as though the review is not the u-turn that many were hoping.
What does this mean to you and your clients?
Many more private sector businesses could cease to hire contractors, prompting more to opt for PAYE. This could be a significant concern from accountants, as they face the prospect of losing freelance clients to PAYE.
Getting things right is essential for you and your clients - whether they are businesses or contractors. Failure to correctly assess contractor status could lead to backdated demands for unpaid PAYE, tax and NIC, and fines for delays and late submissions, not to mention reputational damage which could impact the ability to attract contractors and other temporary workforces
The new tax regime will inevitably mean issues for accountants. Some accountants have already noted that their private sector clients are choosing to go PAYE ahead of the 2020 deadline, rather than risk the very real prospect of retrospective penalties. In some cases, this means they no longer require an accountant to help them with their tax.
However, it might be possible to look at the review as an opportunity.
This may present new opportunities for your practice. A full audit of contractor relations, looking at whether it’s a role that can be brought in-house or whether the necessary steps can be taken to maintain their outsourced status might require your expertise. Your corporate clients may be bringing you more work, just as your contractor clients are heading for the door.
At Rangewell we are ready to help you find the funding for your practice development plans. Working with Rangewell is simple – we have a dedicated accountants partnership team for you to call – and once you have, you can have our nationwide resources working to help you grow your practice.
It can mean having access to the funds you need, along with additional opportunities for revenue for your practice and valuable new services for your clients. Find out more about working in partnership with Rangewell to find better answers for your clients' needs. Our service is free.