IR35: a complicated bit of tax legislation, changes to which were announced about this time last year.
Unbeknownst to a great many people, the IR actually stands for Income Reduction. And the 35 represents the percentage by which your income will reduce, if you’re a contractor.
I mean, it might not be 35%. It could be anywhere from about 25% upwards. So I could be in the right ballpark, but it’s not guaranteed.
In reality, changes to tax rules designed to dissuade employers from using contractors to reduce their tax contributions mean contractors will end up having to pay higher taxes themselves.
This, as you can probably imagine, has gone down as well as Chateaubriand at a vegan banquet.
And after learning about IR35, a lot of people (well, me) were hand wringing over it spelling the end of contract recruitment as we know it.
A year since changes were announced, and a year before they’re due, has it?
First of all, “small” businesses aren’t affected by the rules. Which the government says constitutes about 1.5 million of the 5.7 million businesses that call the UK home.
It’s a rule which means clients engaging contractors have to determine whether they’re inside or outside of IR35: outside means a contractor’s a genuine freelancer; inside means they may as well be an employee.
To find out whether your contractors can consider themselves inside or outside of IR35, HMRC’s come up with the Check Employment Status for Tax tool, or CEST. Although do keep in mind this tool’s been somewhat maligned for its accuracy.
When similar changes were rolled out in the public sector the year before last, 70% of recruiters said contract placements in the public sector dropped.
ContractorCalculator reported “76% of public sector departments lost highly skilled contractors” and “71% of projects were delayed or cancelled”.
These are stats that should be looked at both warily and critically. As a lot of that talent ended up moving, sometimes begrudgingly, from the public to the private sector.
There won’t be that option this time, as IR35 now affects both.
“If engaged to the public sector, the fee-payer (usually recruitment agency) will be required to deduct your tax and NICs at source”
As it stands, it’s up to the end client to determine the IR35 status of contractors and assignments. Samantha Hurley, Operations Director at APSCo explains:
“It is important to understand that determining the status of a contractor is not about the individual or the role – it’s the assignment. This can be confusing. It’ll be up to the fee payer, which is the intermediary, the recruitment business, or whoever pays the contractors’ personal services company, to tax them at the source if they fall inside IR35.”
Determining the IR35 status of individual workers is a difficult legal test.
It’s the fee payer that would carry the liability if HMRC determines either a contractor, or their assignment, inside IR35. And for all intents and purposes, an employee, as far as the government’s concerned.
This applies even if the assignment’s old.
Because of how passing information up the chain works, there’s virtually no chance liability would ever work its way back to the end client.
In fact, unless your agency dissolves, it’s much more likely that liability would fall on the Recruiter.
Markets that will see the most scrutiny are those which use contractors the most frequently. I was a contract recruiter in Life Sciences, and know how many assignments get issued in that industry, so that would definitely be one.
But Construction, Banking, Finance – these are markets where the most attention will be on first. Creative, Digital, Tech… I could go on.
While there’s an indication the most prevalent sectors for contractors will face scrutiny sooner, if you operate a “book” as a recruiter, IR35 is something you need to be well versed in.
It’s been criticised by tax experts, businesses, and contractors as being poorly thought-out, managed, and enforced.
They’ll either have to jack their rates or get paid less to maintain an identical lifestyle. And without being paid in line with permanent employees, despite enjoying none of the benefits, like a salary or holiday pay.
For clients, talent pools will likely narrow. And companies needing a real specialist may be out-legislated when it comes to picking the perfect person.
This is also nothing but speculation but I can see some businesses simply shutting up shop when it comes to taking new contractors on, as a way of avoiding liability altogether.
On the other hand, it’s impossible for employers to go the other way and declare every contract in or out of IR35.
Indeed, part of the problem with it – incidentally, one of its few saving graces – is that each decision is arrived upon individually.
Which is why both contract and perm recruiters need to start having conversations about it now if they aren’t already. If you’re a contracted recruiter, it’s probably time to think about life beyond April, and how it’s going to affect your take home.
For those working contract desks, start having a look when your finishers are finishing.
Anyone in an assignment then, it’ll need to be watertight.
Anyone finishing, or intending to start a new contract, will need to be up to speed on the particulars.
Speaking of, APSCo have knocked up the Off-Payroll Roadmap: a PDF for businesses navigating the changes. The resources found within are equally handy for recruiters to cast their eye over.
There’s a new conduct regulation (13a) coming into play next April, meaning a ‘Key Information Document’ must be provided to all contractors at the point of sign up. It goes into things like take home pay and transparency involving working arrangements in more depth. You can find out more about it, here.
But mostly: talk to your clients and candidates. Ask them what their plans are, and what you can do to prepare and better service them.
Absorb and share resource with your network, your candidates, and particularly active contractors.
It’s a big deal for those who’ve chosen to work outside permanent employment. You’ve got to be an expert on the subject. And if you aren’t a contract consultant, I predict a sizeable chunk of freelance candidates are about to flip to perm…
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