Do you hire freelancers or contractors? You need to know about IR35

Next year (April) sees the introduction of new Off-Payroll Working Rules, which are going to shake up the way medium and large organisations work with contractors and freelancers. If your business hires experts who are off-payroll, you need to be thinking about this now so that you do not lose critical expertise or fall foul of the law.

The taxman and the disguised employee

IR35 was originally introduced to help overcome the fact that many self-employed contractors operate as limited companies, often known as Personal Service Companies, taking a chunk of their income as dividends, which are taxed at a lower rate than employment earnings.

In a toughening up of IR35 legislation, from April 2020 the burden of determining the tax status will fall to the company hiring the contractor. What this effectively means is that businesses will be expected to evaluate whether their contractors are truly self-employed or are in fact “disguised employees”. It will be for companies to ensure that any contractors they engage are paying the correct taxes. Beware, there will be penalties for failing to do so.

The threat to your business

These tighter rules have already been in operation in the public sector for a couple of years and we can learn a lot from the way that that has panned out. Public sector departments have tended to adopt a ‘one size fits all’ approach, assuming all contractors are captured by the new rules and taxing them accordingly. This has resulted in large numbers of contractors leaving and given rise to a talent deficit in many departments.

Contractors are well aware of the impending changes and are wondering how their clients (ie the engaging companies) will react to these changes to IR35. They do not want to suffer a fall in income because the business hiring them does not understand the rules and has chosen to “play it safe” by taxing everyone. Unless they have clarity from their clients, it is likely that they will begin to seek contracts from businesses that are prepared to accurately assess their tax status.

To flip the argument around, however, there are stiff penalties for businesses that do not tax contractors who should be taxed. For many companies, the time and effort needed to assess each contractor will be too great, such that a blanket approach will be taken just to make life easier. If this is you, proceed with caution. Many skilled contractors will fall outside IR35 rules. Taxing them anyway could risk losing them altogether.

What you can do now to prepare for IR35

Start engaging with your contractors now – avoid losing them through poor communication. Experienced contractors can be critical to business growth and success, so this is an issue worth spending a bit of time on. With the right approach, changes can be made to working practices, terms and contracts to make sure everyone is abiding by the law without having to lose talent or money. Perhaps consider the following as an outline plan:

The first step should be to look at your workforce and understand exactly which contractors and freelancers are being used, what they do for the business and how much they cost.
Start a dialogue with your contractors to let them know that you are planning to take a case by case approach, rather than a blanket one.
Find out from them how they are proposing to manage the changes and discuss what changes might be needed to your working relationship with them to comply with new legislation.
If they are captured by the new rules, make sure they understand how their income will change when they start being taxed. If they are not, reassure them and make sure they are aware of your decision and why it was made.

Finally, keep these contracts under regular review. Roles and responsibilities change over time and so too can the liability for tax.