Does the IR35 Reform Affect IT Contractors Working on Daily Rates?

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The IR35 reform — designed to tackle the increasing ‘tax gap’ and crack down on ‘disguised workers’ — has been somewhat confusing ever since it was introduced to the public sector. There is still a great deal of uncertainty as to what contracts do — and what contracts don’t — fall within IR35, and contractors have been asking many questions about the legislation. Amongst these questions, there is one that has been asked very frequently: Does the IR35 reform affect IT contractors working on daily rates?

There are two reasons why this is one of the most complicated aspects of IR35:

1. Day Rate = Contracting?

For many of us, working on daily rates is synonymous with contracting. As an employee, we wouldn’t expect to work on a daily rate, and as a contractor we wouldn’t expect to work for an annual salary. However, in terms of IR35, that distinction isn’t enough. The Government’s IR35 tool, CEST, doesn’t take into account payment agreements, which means that even those working on daily rates can be considered to be employees, if the terms of the contract are in line with typical contracts of employment.

2. The Legislation has Changed

The IR35 legislation as we know it today has been a long time in the making, and there have been many changes since it was initially launched back in 2000. In August 2012, new regulations came into effect that impacted only those contractors working on daily rates of £220 or higher, and with contracts lasting more than 6 months in duration. Businesses had to provide assurance to these contractors that IR35 was being applied correctly. Today, all contracts are affected, regardless of daily rate or length of contract.

What Does This Mean?

With daily rate IT contractors being affected by the IR35 reform, what we are seeing is many contractors choosing to increase their daily rates. They're doing this to offset the financial losses they are experiencing due to being moved from outside IR35 (with contractor tax benefits), to inside IR35 (paying standard tax and national insurance contributions). The concern here is that businesses won’t be willing to cough up these higher rates, resulting in project delays, a further widening of the skills gap, and a rapid rise in unemployment.

Is There a Solution?

The solution is for both businesses and contractors to be clear on exactly where they stand regarding IR35 legislation, and ensure that daily rate contractors are able to keep giving value as contractors.

However, with the extension of IR35 to the private sector still on track for 2020, despite the legislation being famously unclear and incomplete, more needs to be done to ensure that contractors, and those businesses contributing to the future of the UK economy, are in a position to manage change adequately.

At this time, IT contractors in the private sector are urged to consider how their daily rates could be affected with the extension of IR35, and ensure they are prepared for the proposed changes in 2020.

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