What is IR35 and how will it affect contractors?

The first few months of 2020 have seen the government begin to lay out its plans across all areas of the economy. Perhaps the most topical for businesses operating in the private sector is the introduction of IR35, which is likely to come into force as early as 6 April this year.

We caught up with Andy Chamberlain, Deputy Director of Policy and External Affairs at IPSE – Europe’s largest association of independent professionals in Europe – to discuss the new ‘off-payroll’ rules and their implications for businesses.

IR35 has been labelled by some as ‘confusing’ which is of particular concern if it is due to come into play at the start of the next financial year. Can you explain what it is, and why it’s changing?

Andy: IR35 is a piece of tax legislation designed to prevent ‘disguised employees’ from avoiding tax. Disguised employment is where someone acts like an employee, and is treated as an employee by the business they work for, but their employment is ‘disguised’ by the insertion of an intermediary – usually a limited company – that sits between the worker and the client business. This arrangement can result in tax savings for both the worker and the client.

The government believes there is widespread non-compliance with IR35, so it’s changing who has responsibility for determining IR35 status. From April 2020, the hiring organisation will have to determine whether IR35 applies. If it thinks IR35 does apply, employment taxes must be deducted at source from payments to the worker.

How will these changes affect contractors?

Andy: The most frustrating thing about IR35 is that it unfairly affects the smallest companies: contractors or freelancers. Numerous freelancers who legitimately use a limited company model to supply services have been falsely accused of ‘disguised employment’. The April 2020 changes will make this problem worse. We’re already seeing hiring organisations ‘blanketing’ – determining that all contractor engagements are inside IR35 – because they don’t understand the rules and they don’t want to risk a tax liability.

What can contractors do to prevent their clients from incorrectly determining that IR35 applies?

Andy: Alarmingly, many contractors have already been told by their client that IR35 will be applied from April. The contractors do have a right to challenge the client’s determination, but without access to the courts or any other independent arbitration service, we have little faith that clients will be willing to change their minds.

Other contractors have simply been told that the client will stop using contractors altogether. There is little the contractor can do in these situations. They can look for work elsewhere but IR35 is effectively shutting down work opportunities across the UK. The legislation has not been well thought through and business groups are united in opposition to it.

What are the wider implications of the new legislation?

Andy: The Treasury has predicted that implementing the next phase of this legislation will result in additional tax collections of £3.12 billion over the next four years. However, we think this will result in thousands of genuinely compliant businesses being shut down. As a result, the net impact will be negative. IR35 is bad for contractors, bad for the businesses they work with and bad for the economy as a whole.

Andy will be talking more about the impact of IR35 as part of an upcoming webinar hosted by FRP on 17 March. For more information about the webinar and how to sign up, please click here.