The IR35 reform could be coming to the private sector after its implementation in the public sector. Here’s a breakdown of some common questions you may be asking yourself about the reform.
Q. What is IR35?
IR35 is a set of tax rules which were established to prevent employees disguising themselves as contractors to directly reduce their tax obligations.
This has been shrouded in confusion and has been difficult to interpret for contractors and legal professionals alike, as there is no formal criteria used to determine if a contractor falls in or out of IR35 legislation.
This has left many people questioning its ability to adequately fulfil its intended purpose and resulted in many contractors requiring professional advice in order to assess if their contracts are suitably outside the IR35 territory.
Q. The legislative measure has always existed, why is it in the spotlight as of recently?
In April 2017, the Government enforced the reform in relation to the public-sector by placing the responsibility to declare if contractors fall into IR35 on the hiring public institution.
This amendment also carries penalties for any public institution who fails to correctly identify contractors that were inside IR35. This has deeply affected public-sector projects due to the potential over-identification of IR35 contractors in order to avoid legal repercussions, with many contractors being charged significantly more in taxes, whilst still not receiving the benefits conferred to employees.
This has led to a shift in the available number of contractors willing to work in the public-sector and this has been particularly apparent in the IT industry where many contractors have fled to the private sector. The secondary effects of this have seen project delays and increased costs.
Q. Is it coming to the private sector?
When this legislative change hit the public sector, there were rumours that this ‘trial run’ would likely lead to a crossover into the private sector. It appears as though these rumours had merit as the Government is set to consult on whether the IR35 reform should be extended to the private sector.
HMRC believes that a larger majority of contractors will fall inside IR35 with this change being applied across all sectors, which could be concerning for IT contractors working in the private sector. HMRC also hasn’t been afraid of collecting back taxes in cases where they believe freelancers operating under limited companies should have been classified as employees.
Q. What can I do to protect myself?
HMRC has produced an IR35 test on their website to help determine if you would fall into IR35. This can be found here. Seeking professional advice could also help you assess your current situation and determine the best course of action.
Q. What happens if I am found to fall into IR35?
If you are classified as a permanent employee as opposed to a contractor then you could be ordered to pay standard tax and National Insurance deductions from your income, which could affect your take-home pay. HMRC could also impose charges related to previous work if they deem you to have been careless or deliberately avoiding paying the appropriate amount of tax.
Q. What can I do next?
The effect of this legislative change is still being observed. As a contractor, you will still receive the benefit of increased flexibility whilst working, which can be invaluable to your quality of life. It is, therefore, best to speak to an accounting professional who specialises in working with contractors to help understand your status and suggest the best way forward.
To discuss this in further detail, get in touch with the New Business team here at Gorilla Accounting by calling 0330 024 0406 or email info@gorillaaccounting.com.
