The IR35 reforms in the private sector that came into effect in April 2021 have had a profound effect on how self-employed contractors are taxed. If your business hires any off-payroll workers, or plans to in the future, then it’s important to be aware of how IR35 impacts 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 under the new IR35 rules, otherwise you may expose yourself to tax liabilities.
In this article, we highlight four of the challenges you may face under IR35.
1. Understand what the legislation means for your business
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 for end clients.
If you engage contractors in your business, as of April 2021, it is now your responsibility to determine whether they are operating ‘inside IR35’ (employed for tax purposes) or ‘outside IR35’ (self-employed for tax purposes). 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.
2. You don’t have to ‘blanket ban’ limited company contractors
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. This could include a shortage of workers to fulfil your resource demands or if you’re using a limited company contractor in a highly specialised and critical role, you may lose their vital skills.
If your competitors continue to engage limited company contractors, a ’blanket ban’ approach could also 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 that you can trust to apply the Status Determination and make the correct deductions before paying the freelancer. At Search, we have strong procedures in place to assign both limited company workers and our own PAYE workers to meet all employment and tax legislation.
3. Workers may leave to seek higher pay rates
IR35 reforms have undoubtedly affected the take home pay of limited company contractors. Whilst the full effects may not have been seen yet, 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 the reforms – but it’s likely that IR35 will also 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.
4. Consider hiring permanent staff
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 workers on a more permanent basis.
We’ve reached out our database of contractors to ensure they know that this is an option to them, as well as preparing them for the world of permanent work. We will happily introduce contractors to clients who are now looking for permanent employees.
If you’re affected by IR35 and want to talk through your options with one of our recruitment expert, get in touch with us today. We can help both clients and candidates with your next steps.