April 2022 marked the end of the one-year grace period to the ‘off-payroll working rules’ that were included within the IR35 legislation change. The soft-landing period was to allow contractors and firms to prepare for the incoming reform and ensure their compliance.
The changes to the IR35 legislation were implemented in April 2021 following a postponement during the COVID pandemic, with the aim combatting tax avoidance by employees, as well as the companies who hire them, when employees provide services through an intermediary.
This is referred to as “disguised employment”, as workers behave as regular employees but avoid contributions to National Insurance and avoid Income Tax by billing for their services through personal service companies (PSCs), which are taxed at lower rates.
What are the changes?
The key changes to the Off-Payroll tax (IR35) can be found in our previous blog here. In summary, the changes involve:
- Assessing the contractor’s IR35 status for each engagement, rather than the supplier of services.
- The fee-payer (i.e., the party in the supply chain closest to the contractor’s limited company, for example, the recruitment agency or the client themselves) will be responsible for calculating, reporting and processing tax via PAYE on payments made to contractors deemed ‘employed for tax purposes’.
- The fee-payer will now also be liable for employer’s National Insurance Contributions (13.8%) and the Apprenticeship Levy (0.5%) on top of the fees paid to the contractor, as well as assuming tax liability risk if HMRC challenges a deemed status.
- If it is proven that the client hasn’t taken ‘reasonable care’ in assessing a contractor’s IR35 status, the client automatically assumes the position of fee-payer.
Contractors found within the legislation scope (i.e. inside IR35) will be required to pay more tax than they might expect, and failure to adhere to the new stipulations could mean severe repercussions for businesses who ignore, misinterpret or are unaware of the changes. HMRC predicts that the reform will recoup £1.2bn a year by 2023.
How the changes have affected contractors
The changes to IR35 have been met with a fair amount of scepticism, and a recent survey shows that 61% of contractors highlighted the reform as the “biggest threat” to their business. Additionally, new research by IPSE (The Association of Independent Professionals and the Self-Employed) shows that a third of contractors have left self-employment since the changes took effect, which was a concern when the IR35 changes were proposed.
The impact of the IR35 legislation will be one to monitor now that the soft-landing period has ended, but already, many contractors have found alternative ways to mitigate the impact of the adapted IR35 legislation by creating umbrella companies. There is little clarity on how businesses will cope over the coming months as costs have been raised at all levels of supply chains, not to mention the possibility of fines if not compliant with IR35.
If you or your business require help in preparing and/or assessing the contracts you have with all your contractors, as well as advice on the points to consider in the determination of your relationship under IR35, please get in touch.
Contact Simon Thomas on 01639 640164 or email simon.thomas@hutchinsonthomas.com