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IR35 and how it will affect private sector workers


While contractors who work through their limited company don’t get employee benefits – like holiday and sick pay – they have flexibility and control over their work and get some tax relief. HMRC introduced the IR35 in 2000 to assess whether a contractor was a genuine contractor rather than someone trying to take advantage of the tax efficiencies of working through a limited company when, essentially, the contractor is working as an employee.

As an employer, the benefit is not having to pay employers’ National Insurance (NI) contributions or give holiday and sick pay benefits, and for the contractor, you get to pay less tax.

It’s a tricky legislation to understand and has been controversial since its introduction almost two decades ago. There have also been various amendments since 2000. Currently the IR35 has only impacted the public sector. However, as of April 2020, the IR35 rules will be extended to the private sector, directly affecting a lot of contractors. So what does this mean and what can contractors and clients do to prepare?

1. First things first, those working for “small” companies or placed into these businesses by agencies will, for the time being, not be affected by IR35.

2. The responsibility for setting IR35 status will be passed from contractors to the medium and large private sector companies that engage them, so it’s important to get your processes in place to make well-informed IR35 decisions.

3. It’s assumed that “fee payers” will carry the liability in the private sector, provided that everyone in the supply chain fulfils their responsibilities. However, should HMRC find that an end-client hasn’t taken “reasonable care” when setting IR35 status, the liability will be transferred to these businesses – irrespective of whether they are the fee payer or not.

4. A blanket approach to IR35 may see contractors paying tax at a similar rate to an employee, without receiving any employment rates in return. So bear in mind that contractors will look elsewhere if they see blanket, or role-based, IR35 decisions being made.

5. As a contractor, you should test your employment status and figure out if it applies to contracts you are working on. You’ll need to look at how you’re paid, which to be outside of IR35, would generally be on a project-by-project basis, as well as the equipment that you used, how you run your business and exclusivity.

Everyone affected by IR35 should take the next eight months to look at and make decisions around the best way to approach the incoming confusing legislation that will impact the private sector.

Read our related blog: What is IR35?

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