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The IR35 reforms in the private sector coming into effect in April 2021 will have a profound effect on how self-employed contractors are taxed. If your business currently hires any off-payroll workers, or plans to in the future, then it’s important to be aware of how IR35 could impact these contracts moving forward.
The legislation applies to the employment tax status of any worker offering their services through a limited company or Personal Services Company (PSC), and places specific obligations on the client who receives the services of the contractor. If you utilise any off payroll contractors, it is vital that you understand your obligations and prepare to apply the new IR35 rules, otherwise you may expose yourself to tax liabilities.
Having supported contractors through similar changes in the public sector in 2017, Search understands the challenges that lie ahead for clients, and we have highlighted 4 of them.
IR35 Regulations can be confusing, but if you are a client who uses contractors in your business, it is vital that you understand the legislation, and the steps that you now need to take. HMRC has issued specific guidance to clients.
If you engage contractors in your business, from April it is your responsibility to determine whether they are operating inside (employed for tax purposes) or outside (self-employed) IR35. Each role must be assessed individually to ensure that your business complies with the legislation.
Once you have made an IR35 determination, you must issue a Status Determination Statement to your contractors and the agency who supplies them. This should clearly state your conclusion, and the reasons for coming to it. You must use reasonable care when assessing the evidence and arriving at your determination.
Make sure you retain this document and all supporting information as evidence.
With not long to go until the April 2021 deadline, some employers may take the policy decision to “blanket ban” the use of limited company contractors. Whilst this might avoid the burden of carrying out IR35 determinations, and avoid the potential tax risks, it may present other risks such as a shortage of workers to fulfil resource demands, or where an organisation is using a limited company contractor in a highly specialised and critical role.
If your competitors continue to engage limited company contractors, a “blanket ban” approach could make you a less attractive option for top talent. Having a robust but commercial IR35 strategy in place, and operating best practice procedures to comply with the new legislation should enable you to continue to engage contractors “outside IR35” if the circumstances of the role allow.
And don’t forget, you can still engage limited company contractors from a compliant agency, who you can trust to apply the Status Determination and make the correct deductions before paying the contractor. Search has strong procedures in place to assign both limited company workers, and our own PAYE workers to meet all employment and tax legislation.
IR35 Reforms will undoubtedly affect the take home pay of limited company contractors. Whilst the effect has yet to be seen, the 2017 reforms in the public sector brought about widespread market instability as workers sought to move for higher pay rates to match their previous take home pay under the old tax regime.
It will take some time for the market to adjust to IR35 reform – it’s likely that IR35 will have an inflationary effect on rates of pay and this will vary depending on the sector. For example, in Healthcare, whilst the majority of contractors will see their net take home pay reduced for tax, it is also likely that hirers may have to take a commercial view of how far they are prepared to go to soften the blow for the contractor, and retain the necessary resource.
The risk – contractors move to a competitor who offers higher rates, leaving your business exposed to resource gaps and skills shortages. It may become even more expensive to fill those gaps in resource-scarce sectors, where urgent staffing requirements will command premium prices.
It’s essential to work with suppliers that you can trust. Partner with an employment agency that understands your business, your sector and your position in the market, and one that has a strong track record of delivering quality candidates.
If contracting becomes less attractive to the community of limited company workers, there may well be a renewed interest in permanent work for roles that fall within IR35. Businesses often use contractors to fill gaps caused by vacancies, so the reforms may present an opportunity to fulfil them with long-term, trusted contractors.
Search has been reaching out to ensure that our contractors know that this is an option to them and preparing them for the world of permanent work. They will happily introduce them to the clients who they have provided their services to.
If you’re affected by IR35 and want to talk through your options with a recruitment expert, get in touch with us today. Search can help both clients and candidates with their next steps.
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