Are you ready for IR35?
It’s been a miserable year for many freelance and self-employed (inc small ltd businesses owners) who provide services to others using their own business entity. As many as 2million of them have been excluded from any government support during the pandemic, unable to claim grants, furlough, or rate relief, and despite the protestation, come April 2021 we will see the Government roll ahead with its plan to introduce IR35 rules to the private sector.
What does it mean?
The new rule will mean that contractors who are employees in everything but name will no longer be able to provide services to a client without a change in employment status - effectively becoming an employee of the client they are providing services to. There is a qualification criteria but essentially the change will see some being forced to undertake employment with all the taxation and NI contributions that will bring (and employment benefits) or go without.
The treasury estimates it lost nearly £800m in revenue last year by not bringing this change in last April as originally planned. Some believe this is precisely why many have been excluded from financial support. This is up for debate but whatever your view, this is going to have far reaching impacts for both contractor and employer.
The upcoming IR35 changes mean that:
Medium-sized and large businesses will be responsible for working out the contractor’s employment status, not the contractor. There will be a ‘notice’ and ‘response’ type arrangement where the client will discuss their decision of status with the contractor and where there is a disagreement, this can be challenged.
Small businesses are exempt from the changes – so if the contractor works for a small client, the contractor will still be responsible for working out their employment status
End clients are classed as small businesses if they meet two of the following criteria:
Annual turnover of no more than £10.2 million
Balance sheet total of no more than £5.1 million
No more than 50 employees
So what’s the problem?
There are pros and cons for both contractor and client. A few of each:
It gives contractors converting to employees employment rights such as sick pay, holiday pay, paid leave, employment protection rights (after 2 years under current regulations).
Fickle supplier contracts can be a bit of a feast or famine arrangement at times. A full time employment contract brings a level of comfort and ability to plan financially. This certainty is better for lenders too if seeking finance for homes or cars, for example.
Companies can retain and perhaps retrain talent that otherwise could disappear at any time.
It removes the flexibility of a limited contract for both contractor and client. It’ll likely be an all or nothing type arrangement (unless of course a contractor can prove they are no solely employed by the one client, in which case they might be able to retain their contractor status).
With employers NI and offering of other benefits, plus any potential uplift in the new wage to compensate for the contractor receiving a reduced net monthly sum, it could be become quite a bit more expensive to keep the contractor on, especially at a time when they are not needed or between what would have been ‘contracts'.
Contractors might now find themselves tied into new norms. They may not be able to come and go as they please or perhaps dictate their working hours. To a greater extent they will have to tow the corporate line and join the ranks of the employed, like it or not.
The former contractor now employee may find their take home pay will be reduced. Paying tax and NI at source does have some benefits but there will be no off-setting new hardware of software against earnings. Expense policies will vary from one workplace to another and those train journeys and subsistence receipts will most probably dissolve overnight.
There is no doubt that there are many hidden employees going under the radar with plenty of cash-based contracts going unidentified or undisclosed up and down the country. This has to stop. But, where genuine contractors have setup to provide services and do so providing value and flexibility to the client and contractor, and where tax and NI is paid by the contractor in fair measure, some will feel they are being forced to choose between employment or closing their long term business. Whatever your view, it is coming and needs dealing with.
We’ve helped clients make the switch over the last year and it has proved a successful process. It will require a little planning and consultation and every situation will be a little different, but we can help you make the most of the change.
To get some advice and guidance, get in touch to see how we can help.
For further reading and info - https://www.gov.uk/guidance/april-2020-changes-to-off-payroll-working-for-clients