IR35 In The Private Sector And What It Means To Agencies, Businesses and Contractors


Chancellor Hammond stirred the pot in the world of contracting with his announcement in November 2018. IT has been decided that the IR35 changes in the public sector implemented in 2017 will now affect the private sector too. As of April 2020, off-payroll workers will no longer be able to decide their own IR35 status.

The reason behind applying IR35 regulations to private sector.

The main reason behind this employment legislation change was the unfair tax advantage for contractors. According to the Government, the decision has been made to even the rights between contractors and full-time employees. The Government stated that it is unjust that a self-employed person should pay less tax than an employee earning the same amount of money.  

Who will be affected by IR35?

It is obvious that contractors will be affected the most. However, businesses and recruitment agencies should keep their fingers on the pulse too. As far as companies are considered, the regulation applies only to large and middle size businesses.

Definition of a large/middle size business:

  • Its turnover is more than £10.2m
  • Its balance sheet assets must be no more than £5.1m
  • It has 50+ employees

Challenges caused by the new IR35 legislation:

Contractors.

To begin with, freelancers will face a massive income drop. As fair as it may sound at first, the Government did not take into consideration the fact that contractors do not have access to the many benefits permanent employees get. These include: sick pay, holiday pay, maternity leave, national insurance, and pension contributions.

Moreover, contractors will have to take CEST IR35 test to prove that they are genuine freelancers and not off-payroll workers. After 750,000 contractors have undertaken the test, the results are as following:

54% – Passes

41% – Failed

15% – Interminable

This means that almost half of the UK contractors are inside IR35.

In addition to the above, it is feared that many contractors will have to stop using their limited companies. Even if they are verified by the test. Previous experienced with the public sector has proven that many departments simply decided to avoid using contractors operating through their limited companies to avoid additional complications. 

Businesses.

Although, it is a self-assessment test for contractors, it is employer’s responsibility to identify contractors within IR35. If a company declares that the hired contractor is outside IR35 and in reality, he is not, it will have to pay the penalty.

On the other hand, if the contractor is found to be inside the IR35 but they passed the test, then the company would not be liable.

Furthermore, companies will no longer have control over the work done by contractors.

Recruitment agencies.

The new legislation does not concern the agencies directly. It will disrupt the normal course of their operations nonetheless. First of all, it will be much harder to source new contractors for the end clients. The new regulation is expected to cause the exodus of contractors from the UK. Secondly, it is in the agency’s interest to supply end clients with lawful contractors. Therefore, additional check-ups and paperwork will be required.

The solution.

Using an umbrella company remains the best solution so far for all the parties involved. It entirely takes the responsibly of the shoulders for agencies and companies. In the meantime, saving money and time for contractors. As well as allowing them to stay fully compliant.

 

Do you have any questions? Get in touch now. Bradford Jacobs guaranties compliance with the local employment and tax legislation in over 24 countries.