Businesses urged to prepare now for private sector IR35
by Alan Little
A specialist contractor recruitment agency has warned private businesses to get ready now for IR35 reforms, which are set to radically change contracting in the private sector.
Writing in the recruitment news source OnRec, Outsource UK’s Head of Compliance and Contractor Care Victoria Roythorne details the nature of the reforms and how they will affect contractors, recruitment agencies and private sector end clients.
Despite mounting evidence from representatives of the professional contracting and recruitment sectors that the reforms in the public sector have been immensely disruptive, damaging and confusing, Roythorne rightly notes that the Government appears to have adopted HMRC’s view that the reforms were a success.
Most industry observers expect the Chancellor to announce a private sector rollout in his Autumn Budget, which is scheduled to take place on 29th October. Roythorne believes that even if the reforms aren’t included in this Budget, they will almost certainly arrive in the private sector in the foreseeable future.
Explaining that the 2017 reform of off-payroll tax rules transferred responsibility, and liability, for determining a contractor’s tax status (employee or contractor) from the freelancer, which had been the arrangement since IR35 was first implemented in 2000, to the end client or the recruitment agency, she sets out the implications for the private sector when engaging limited company contractors. The rules are irrelevant to contractors working via umbrella companies as they are employed by the umbrella and pay employee-level tax and NICs on a PAYE basis.
Businesses who get the IR35 determination wrong for the limited company contractors they engage face three main areas of concern, which Roythorne identifies as:
- Financial penalties
Any assignment deemed by HMRC to be ‘inside’ IR35 will require the entity responsible for paying the contractor (the end client or recruitment agency) to deduct employee-level tax and NIC before paying the freelancer. Failure to do so will result in liability for unpaid tax and NICs.
Blanket determinations are unacceptable as the legislation requires “reasonable care” to be taken during IR35 assessments. Contractors are likely to prefer clients who understand the rules and have taken the necessary steps to ensure compliance.
- Increased costs
Many contractors affected by the rule changes in the public sector responded by increasing their fees to offset the additional tax. This may well happen in the private sector too, and firms may need to prepare for an increase in the cost of contingent labour.
Roythorne concludes: “contractors add significant value to the economy, along with adding invaluable expertise to businesses which require specialist input to complete projects”.
Preparing for IR35 now should, she cautions, be a key consideration for businesses.