In April, the IR35 tax reform is set to come into play. These off-payroll working rules are causing huge concern for contractors, with many unsure how it will impact their livelihood.
So, what is IR35 and will it apply to your business? Below, you’ll discover everything you need to know about the new regulations being introduced and how it may impact your business.
What is IR35?
So, what is IR35? Well, it is part of the Financial Act and it’s basically a set of tax laws relating to freelance workers. The first part of this legislation was introduced back in April 2000, but off-payroll reforms were included in April 2017.
Changes were made due to the original laws being unenforceable. The new changes introduce a new way tax is treated for freelancers and the firms who hire them. Now, companies such as recruitment firms, will need to asses contractor status and potentially pay employment taxes on top of what they already pay to the contractor.
The government is said to have introduced new IR35 rules to tackle issues with “deemed employment”. Basically, companies have been hiring freelancers and contractors to carry out work which would otherwise be deemed as full-time employment.
Who does it apply to?
The new IR35 rules apply to all intermediaries who hire freelancers and contractors. It is also set to impact freelancers and contractors themselves. If the contractor would otherwise be deemed an employee providing the same services directly to the business, that is where IR35 kicks in.
From the 6th April 2020, public sector and both medium and large private sector companies, will need to establish whether the new rules apply to them. If they do, additional tax will need to be paid to ensure the worker is paying the same as a full-time employee.
How might it impact contractors and recruiters?
The trouble with these new IR35 tax rules, is that they are fairly complex to understand. An intermediary is typically thought of as an agency, such as a recruitment agency. However, in terms of the IR35, the majority of intermediary’s are actually the contractor’s own private company.
The key thing to remember with IR35, is that if it is a public sector contract, the hirer is responsible for determining the status of the employee. However, if it is a private business contract, it’s the contractor’s job to figure it out.
This can cause a variety of issues for contractors. If they don’t get it right, they face a significant tax burden. Many freelancers and contractors are worried about how it’s going to impact their business; particularly given how complicated it is to understand.
Overall, the IR35 rules are set to be introduced in April 2020. If you aren’t prepared, it could end up costing you a large tax bill and potential fines if it is deemed you are trying to avoid the right level of tax.