If you can believe it, it’s been a full year since the IR35 reforms were launched in the private sector. Of course they were a bit late. Originally planned to launch in April 2020, the coronavirus pandemic forced Chancellor Rishi Sunak to delay them in order to give hiring companies and end clients a reprieve. However, that didn’t stop the reforms from launching the following year and April 2021 saw changes to the off-payroll working rules to limited company contractors working in the private sector.
IR35 affects contractors who work via limited companies (not sole traders) and Limited Liability Partnerships, and it’s designed to detect contractors who are really disguised employees (i.e. fulfilling the same function as a permanent employee but being paid via their limited company) to ensure they are paying the appropriate rate of tax. Previously, it was left up to contractors to declare whether or not they were inside IR35, however, the new legislation shifts the responsibility for declaring a contract inside or outside IR35 from the contractor to the end client - having them issue a Status Determination Statement (SDS), which should clearly detail why the contractor is or isn’t caught by the legislation. It also shifts the tax liability from the contractor to the fee payer (usually the recruiter or the end client). Whilst it hasn’t all been plain sailing, the new legislation is clearly here to stay. So, what do personal service companies (PSCs) need to know one year on?
A contractors guide to IR35 legislation in 2022
Contractors have had to get their heads around a lot over the last year. As well as dealing with the challenges of the pandemic, they have also had to get used to a new way of working with IR35 legislation and understanding all of the terminology fully.
For instance, having to really understand the difference between being ‘inside’ and ‘outside’ IR35. The quickest answer is that if you are outside IR35 then you are considered genuinely self-employed and the IR35 legislation does not apply. However, if you are inside IR35, then you are considered to be, in effect, an employee for that particular engagement due to the nature of your contract and working practices. In this instance, IR35 does apply and you will be taxed at source via PAYE using the same rates as an employee.
Contractors have also had to learn when they are still responsible for determining their IR35 status because, believe it or not, the IR35 changes don’t affect all limited company contractors. Those whose clients are small businesses, for example, are not affected by the changes. You can find more details on IR35 legislation in this blog, as well as what to do if a client fails to assess your IR35 status. It’s been a lot to learn for both contractors and clients.
What do contractors need to do?
Prior to 6th April 2022, we were in a ‘soft landing’ period to allow contractors’ end clients (and recruiters) time to adjust to the new rules. This is over now which means HMRC will be pushing harder to apply penalties where they deem statuses to be incorrect. However, in cases where contractors are not responsible for determining their status, it is the end client and/or fee-payer who carries the risk – so, technically, contractors don’t have to do anything. However, it could be useful to check issued SDSs are accurate. If they aren’t, you can appeal them.
Kingsbridge has recently surveyed contractors, end clients and recruiters, looking at IR35 - One Year On. The results are now in and they really are eye-opening!
Some of the highlights include:
· 66% of contractors would not consider an inside IR35 role
· 49% of contractors have considered closing their business due to IR35 reform
· End clients are almost twice as likely to have to pay a contractor more to work inside IR35 – and 65% of contractors have said they would try to negotiate an increased rate if placed inside IR35
· 71% of contractors are only looking at outside IR35 roles during the next six to 12 months, yet these account for less than 41% of the roles available
· Positively, 60% of contractors said they were involved in the status determination process, and 42% feel confident about the future, working outside IR35
These results show that while IR35 headlines have maybe quietened a bit over recent weeks, IR35 is still causing issues for limited company contractors.