IR35 is the common name for the Intermediaries Legislation, which is designed to combat tax avoidance for off-payroll contractors working in the public sector.
The legislation was introduced to tackle the issue of ‘disguised employment’, where organisations engage workers on a self-employed basis - usually through an intermediary or limited company - rather than on an employment contract. As a result, the organisation could save a significant amount of money as they don’t have to pay employers’ NICs, and they do not have to offer any employment rights or benefits.
While this has been reserved for the public sector, the government has suggested that the legislation is likely to be extended to the private sector by April 2019.
How will this affect hiring contractors in the private sector?
If you rely heavily on IT contractors or short-term employees, then many of those resources would be put at risk with IR35 ruling. The introduction of IR35 in the public sector made it increasingly difficult for contractors to run through a limited company, without large tax implications; a situation likely to be repeated in the private sector.
In a recent survey of more than 2,000 contractors, 94% noted that if legislation extended to the private sector, they would avoid contracts that place them 'inside IR35'; 73% said they would only accept IR35 contracts if they introduce a significant hike in their day rate, while in more extreme cases, 23% would stop contract work altogether if they were required to work inside IR35.
The financial impact of IR35 will also be significant. It could reduce the worker’s income by up to 25% and costs the typical contractor thousands of pounds in income tax and NICs. As a result, there will be an increasing skills shortage and administrative burden, a reluctance to accept unqualified contract work, and further hikes in day rates because there is no tax relief.
Preparing for IR35 and how Ignata can help
Like GDPR, the best defence against IR35 is a strong offence which means auditing your current contractor agreements and ensuring they are watertight and not subject to the strict regulations imposed by IR35.
We realise the challenges faced by our clients of having no single point of ownership for their contractor recruitment, the implications of cost control and governance of this process as well as, and most significant, the risks that new IR35 rulings will have on your organisation.
We have extensive experience working with the off-payroll rules for our public-sector clients (through Local & National Government framework agreements) and have experience of supporting clients to ensure continuity during the transition from the old rules to the new rules.
A number of clients are turning to us for our expertise to manage their contractors and assist them with managing costs, contractor compliance and IR35 rules.
Talk to us for advice on preparing for IR35. Email Howard Murfin, Commercial Director – firstname.lastname@example.org to arrange a free, no obligation consultation.