The IR35 legislation, which now applies to both the public and private sectors, aims to stamp out bogus self-employment by ensuring that contractors using a personal service company who are operating as an employee pay the correct tax and National Insurance.
The new off-payroll rules move the responsibility of employment status determination to the end client who is the organisation receiving the services from the contractor. In practice, this means recruitment businesses or clients are now responsible for deducting taxes if they are paying contractors directly.
So what does this mean in practice and how have the IR35 off-payroll changes been received?
The good news
Many industry sectors, particularly IT and technology, have dealt with the reforms in a responsible way, mainly due to the fact they experienced the impact on the public sector in 2017.
Research from Brookson Legal and Jobfeed showed that IR35 was mentioned in almost a quarter (24%) of the sector’s job adverts for contractor roles (week commencing March 8 2021). By comparison, other contract-reliant sectors – such as insurance and finance – saw only 6% of adverts mentioning IR35.
The not so good news
It is fair to say that there has been more than an element of confusion when applying the new rules. In an attempt to help employers to define the status of contractors, HMRC introduced a Check Employment Status for Tax (CEST) tool. CEST has been criticised for simply adding to the confusion around determining status, with a result of ‘unable to determine’ being a regular outcome when using the tool.
Financial threats to self-employed workers
Not surprisingly, many industry experts have expressed fears about the damage being done to the UK’s once thriving freelance and self-employed sector.
Previously, contractors had the responsibility of making their own employment status determination and paying HMRC tax and National Insurance. Now the responsibility has shifted contractors rates are being reduced to take into account additional employment costs such as Umbrella fees which ordinarily they wouldn’t have suffered.
Many larger businesses, particularly in the finance and corporate sector, who have previously employed lots of contractors, have now enforced blanket bans on engaging with contractors working via personal service companies.
This is not considered to be a failure of taking “reasonable care” in accordance with IR35 rules and HMRC’s perspective as the clients are not making a blanket decision on contractor’s employment status’. They are simply making the decision to employ all contractors, therefore reducing any risk of complying with IR35 off-payroll rules.
Unregulated umbrella companies
Contractors and end clients should not assume that simply engaging with an umbrella company is the answer. There are fears that the IR35 changes have encouraged the growth of unscrupulous providers and the mis-selling of tax avoidance schemes. You can read more here about mini umbrella companies (MUCs) fraud.
Reputable and established umbrella companies will be transparent in all their dealings with contractors, ensuring terms and conditions are clearly stated in a formal employment contract. This will cover how wages and expenses will be paid, how deductions are calculated and arrangements for holiday pay.
The fear is that many freelancers will be unfamiliar with the concept of umbrella working, so could unwittingly sign up to an umbrella company that doesn’t have their best interests at heart.
Call for action
MPs and peers in the all-party parliamentary group (APPG) have urged the Government to review the IR35 changes. In their report, members warned that classifying contractors as employees is creating a second class status where workers do not enjoy the same rights as permanent employees.
The report added that the changes had failed to deliver the intended reduction in tax avoidance by workers falsely claiming self-employed status. The new rules are also being blamed for unintentionally making it harder to define contracting.
The IR35 off-payroll changes have underlined the importance of employers and contractors working together to find the best solution for both parties. Coming up with an agreed approach will have long-term benefits, not least providing peace of mind regarding potential HMRC action and fines.
By seeking professional advice, businesses can continue to access the top talent they need to ensure they thrive in a post-Covid economy.
The next steps
For further information or support, please contact Marie Pegram or your usual local UHY adviser.