Possibly the most debated measure contained in the budget for our freelancer and contractor clients. IR35 is a tax legislation designed to combat tax avoidance by workers supplying their services to clients via a third party (such as a limited company); but who in reality, are performing services in the same way as an employee. If you are classified as an employee, you pay more employment taxes.
To help clamp down on this activity, HMRC introduced changes to IR35 in the public sector in April 2017 in April 2017. The changes shifted the responsibility in making IR35 status assessments from the limited company (i.e. the worker) to the agency and the end client. However, after some difficult legal cases and issues with the HMRC online tool available for checking employment status, the government has decided to proceed with caution.
Proposed changes to IR35 in the private sector are:
- Businesses will be responsible for assessing an individual’s employment status.
- The reform won’t apply to the smallest 1.5 million businesses, and the large and medium businesses to which it will apply will be given longer to adjust, with the changes being introduced in April 2020.
- From 6th April 2020, medium and large businesses will need to decide whether the IR35 rules apply to an engagement with individuals who work through their own company.
- Where it’s determined that the rules do apply, the business, agency or third party that pays the individual’s company will need to deduct income tax and employee NICs and pay employer NICs.
- HMRC won’t carry out targeted campaigns into previous years when individuals start paying employment taxes under IR35 for the first time following the reform, and businesses’ decisions about whether their workers fall within the IR35 rules will not automatically trigger an enquiry into earlier years.
- HMRC continues to work with stakeholders to identify improvements to checking employment status for tax and issuing wider guidance to ensure the reform meets the needs of the private sector. Enhancements will be tested with stakeholders, and operational and legal experts before implementation.
A further consultation on the detailed operation of the reform will be published in the coming months, and will inform the draft Finance Bill legislation that is expected to be published in summer 2019.