The current rules and regulations surrounding IR35 were originally introduced in 2000 by the Government in an attempt to tackle perceived tax avoidance. The target was individuals setting up personal service companies to provide services to just one other company, namely the client.
Although this was tax efficient for them, it could be deemed by HMRC to be a sham.
In recent years, HMRC have started to clampdown on tax and national insurance loopholes. In 2017, IR35 was beefed up for those in the public sector, by shifting the burden of determining tax status for work undertaken by personal services companies to the client. The move resulted in contractors being paid in the same way as employees.
It was anticipated that from April 2020, legislation regarding IR35 would be expanded to embrace large and medium-size businesses in the private sector, i.e. those with more than £10.2 annual turnover, more than £5.1 on their balance sheet and more than 50 employees.
However in light of COVID-19, the Government have announced the anticipated changes to IR35 in the private sector will be delayed by a year until April 2021.
These changes do bring with them an additional cost burden to a business, because if a determination is made that work carried on its behalf is deemed employment, the Company will have to pay the 13.8% NICS and also the 0.5% apprenticeship levy where appropriate. There is a concern that many businesses are unaware of the seriousness and complexity of the new rules.
In many ways the rules are an unfair burden on businesses who rely on using specialist contractors as a number of liabilities pass over to them. This includes them having to be responsible for issues such as National Insurance contributions and employment taxes.
It is a weight many do not need but must understand if they are to stay on the right side of the rules when they engage contractors. Those who do not comply run the risk of having a significant impact on their finances and their reputation.
Although the changes have been pushed back until April 2021, employers should not put the matter to one side for now, as medium and large companies should still take action now to identify in advance of the legislation coming into force any contractual arrangements which may fall foul of this future legislation.
For further information, please do not hesitate to contact the Employment Team on 01905 734037 or by completing the online enquiry form.