With all the craziness that’s happened over the last few weeks from the election, one of the weirdest developments to arise at the new PM getting elected has been the slight panic from big companies who hire contractors as employees; all because of IR35 updating in 2020.
Many banks and financial companies who hire individuals on a contractor basis, rather than as a full-time employee, have been getting worried about the new changes in the rule. It could see them paying much more in taxes, and have to use more resources in applying designation to what exactly a freelancer is.
Confused by IR35 and what it means for businesses and freelancers? Don’t worry, pretty much everyone is. Here’s what you need to know about IR35 and why there’s been such a reaction over election week.
What exactly is IR35?
In short, IR35 is a tax avoidance rule to help contractors who don’t currently fall under HMRC’s definition of being self-employed. If you want a full rundown, Empiric has a full definition of the rule and breakdown which you can read here.
What is the problem with IR35?
With new rules for IR35 coming in for April 2020 when the next tax year starts, some companies are concerned that with the onus now on them to decide what side of the line a contractor’s tax status should fall on, they’ll end up with two problems.
Firstly, they’ll misdiagnose what area contractors fall into on specific jobs. This in turn would lead to paying too much tax.
Secondly, some experts believe that the rule changes could see the government get an extra £1 billion every year in tax simply because people get the rule changes wrong. That’s a lot of money that companies would rather have in their pockets.
What has the election done to IR35?
Right now, not much has changed in terms of the new rules being rolled out. The problem is that some big businesses do not want the designation being something they have to deal with. On the day before the election, GlaxoSmithKline sent out emails ordering all contractors working with them to drop that status and switch to pay as you earn (PAYE) status. If they didn’t, then they’d have to leave the company – a company they technically don’t work for.
Many experts are asking that the government looks into reviewing the rule changes as well as they feel it’s simply too confusing for anyone to work out easily.
What does all this mean for contractors?
Imagine you are self-employed and get hired as a contractor to work on a job. While you’re not an employee for that company, you’re going to work for them without any of the same benefits as employees.
So if you’re a contractor who has to travel and would usually have expenses to recoup, that might stop. This would create an incentive to not work for a company, and look elsewhere for better pay that covers costs.
What does all this mean for employers?
With the IR35 changes in 2020, off-payroll rules become more prevalent for contractors. This means that the shift in responsibility and tax risk to the contractor moves over to the employer. Employers don’t like this because they would have to potentially pay National Insurance on top of their contractors’ fees when previously it was deducted.
So if we take the example of GlaxoSmithKline, they might have thousands of contractors working for them. That’s thousands of people they’d now have to suddenly start paying more tax on for (in their opinion) no real reasons. GSK has said they’re employing more managers to deal with designation but feel it’s a case of hiring people for a job that shouldn’t exist.
How can a contractor learn what to do?
With the government possibly waiting until March to announce a new budget, contractors and employers are feeling left in the dark if they don’t know exactly what taxes will look like after IR35 changes.
Everyone, even employers, should check out this guide on how IR35 will affect you. Any contractor feeling a little confused should seek out help to make sure that when April comes around, they’re fully compliant with the change and know 100% that they’re paying the right taxes.
