IR35 - Update

As of 6 April, contractors will have to take on self-employed people they use consistently as PAYE staff. Firms that are unprepared will face trouble with HMRC, a tax expert has warned.

The IR35 change was announced in 2018 and large contractors are understood to have done extensive preparation for the new rules, according to Brendan Sharkey, partner at accountancy MHA MacIntyre Hudson. Some smaller firms are yet to get to grips with the new rules though, he warned. “It’s only when they’ve read about it in the press, got their heads around it, and thought, ‘you know, I think we’re sitting
on a problem’,” he said.

Firms that have not adapted to the new rules should start the process now to mitigate any problems with HMRC. “Make an effort to get your act, right,” he said. “If you don't make an effort and think the old ways still work, you're heading for a big showdown with HMRC. If you can actually show that you are sorting it out, you do get some points for that, because that's what they want you to do.”

HMRC has vowed to take a light-touch approach to enforcement for the first 12 months of the new system. The changes were meant to be introduced in April 2020, but just under a month before they were due to go live, a 12 months delay was announced in response to the pandemic.

IR35 was first introduced in 2000 to combat tax avoidance arising from people being paid through a limited company despite working like an employee. The new changes put the onus on medium and large companies to make the determination whether a worker that operates through an intermediary should in fact be treated like an employee and be taken on to the company’s payroll. For small firms, it is up
to the intermediary to confirm their status.

Industry experts have suggested the new rules could lead to more direct
employment, which could help to boost skills with contractors investing more in staff. Critics have argued the new system will slash income and employment for previously self-employed staff.

Association of Independent Professionals and the Self-Employed (IPSE) director of public policy Andy Chamberlain said the change would add to the "financial carnage" caused by the pandemic. He claimed that clients were taking blanket approaches to the new rules. "Many clients are pushing all their contractors inside IR35 – against the rules of the legislation. Many more are only engaging contractors through umbrella companies, while others are scrapping their contractor workforces altogether – just when, as the economy opens up, they will
need them most."

Chamberlain called on the government to rethink the policy and also carry out a "root and branch" review of self-employed taxation in the UK.

Contractors may be able to keep site workers off payrolls by employing them through contracts on a job-by-job basis. Sharkey said: “If they're a specialist in a certain area, companies need to put it into a situation where they are a preferred supplier and they've got to quote for the work.”

It will be harder to avoid taking professional office-based workers on as employees, however. “It’s the ones who are in the office and basically part of the furniture,” he said. “You’re really going to struggle [not to employ them].