4 Things You Need to Know About Proposed Changes to IR35
On 29th October 2018, Philip Hammond delivered his third Budget as Chancellor, and his last before Britain leaves the European Union in 2019. While there were many notable announcements, perhaps the most relevant for contractors was the information shared about the proposed changes to existing IR35 legislation, and, even more interesting, amendments to the timeline of these changes.
Here are 4 things you need to know about the IR35 reform:
1. IR35 Legislation will be Extended to the Private Sector
To date, the new IR35 tax rules have affected only those contractors working within the public sector; government, education, and healthcare organisations, for example. However, it has been announced that these rules will be extended to the private sector in the near future, resulting in even more contractors being affected. Private tech companies, banks, private health and education organisations, legal, accounting, hospitality… these are just some of the industries that stand to be shaken up by IR35.
2. Some Contractors may be Required to Pay More Tax and NI
Contractors in the private sector that are found to be working inside IR35 — that is, working as an employee rather than as a contractor — will be required to pay tax and national insurance contributions at the standard 12% rate. This may also be backdated to the start of your contract. According to research by the BBC, those contractors that have previously been paying the lower tax rate (a benefit of working outside of IR35) could see their overall income fall by as much as 25% due to the proposed changes.
3. Smaller Businesses will not be Affected
Under new IR35 legislation, businesses will be responsible for determining whether or not their contractors fall inside or outside of IR35 rules. For this reason, it has been announced that the country’s 1.5 million smaller businesses will be exempt from the decision to extend IR35 into the private sector in a bid to minimise the administrative burden on growing and developing SMEs. Instead, only larger businesses will be affected, as well as contractors working for larger, privately-owned organisations.
4. The Big Changes are Scheduled for April 2020
It had originally been expected that the extension of IR35 into the private sector would occur in April 2019, following announcements that clamping down on ‘disguised employees’ within the public sector has already gone a long way towards closing the significant ‘tax gap’. However, Chancellor Philip Hammond used the 2018 Budget to confirm that IR35 changes would not be put in place until April 2020, providing both businesses and contractors with more time to prepare and consider contracts in place.
The delay of the IR35 reform is certainly a bit of good news for contractors. However, a number of problems still remain. Firstly, this delay does not clear up confusion surrounding the legislation, and many contractors are still unsure whether their contracts fall inside or outside of IR35. Secondly, despite the delay, the concern for contractors remains: that they could experience a significant drop in income.
It is time for contractors to act. Now is the time for contractors to work with the experts to determine where they stand, and ensure they are prepared for when new IR35 rules are implemented in 2020.