The imminent arrival of the 2021/22 financial year on 6 April brings with it the introduction of IR35 reform in the private sector - a change that affects thousands of businesses engaging contract workers, the recruiters who place them and, of course, hundreds of thousands, if not over 1m, contractors.
Much has been made about IR35 reform recently, particularly in light of HMRC losing a high profile IR35 case against the TV presenter Kaye Adams at the Upper Tier Tribunal just weeks before the roll out of this controversial reform.
Yet another HMRC loss, which has done nothing to improve the taxman’s woeful record in IR35 tribunals, simply reinforces the opinion of most contractors, businesses and experts (myself included) who are still gravely concerned about the government’s understanding of this tax legislation.
Despite having created the IR35 rules more than two decades ago, it is clear that HMRC cannot recognise if a contractor should belong inside or outside the confines of the legislation they not only police, but insist on reforming too.
IR35 reform is manageable
Before I go any further, though, I must add that - contrary to speculation and unhelpful scaremongering, IR35 reform can be managed through a pragmatic approach.
By avoiding risk-averse decisions, the reform will not, by any stretch of the imagination, spell the beginning of the end for flexible working and in turn, contracting.
That IR35 reform is manageable is perhaps the most important point I will make within this article.
But understandably - and as you might be aware - many contractors and the businesses that rely on these workers are deeply worried about IR35 reform.
Mirroring changes that were rolled out in the public sector in 2017, private sector IR35 reform will see contractors lose the right to determine their IR35 status when working with medium or large businesses.
Instead, the firm engaging the contractor - often referred to as the end client - will pick up this responsibility, in effect assessing if the service provided by the contractor is delivered in a manner that reflects self-employment (outside IR35) or employment (inside IR35).
Explained differently, this will mean contractors’ clients - many of whom have never needed to consider this legislation until very recently - will soon decide if the worker should be self-employed or employed for tax purposes. I say soon, but in reality most businesses have started assessing the IR35 status of their contractors in the lead up to 6 April.
Financial implications
Financially speaking, the difference between working outside or inside IR35 can be huge, with contractors operating inside the clutches of the legislation or via PAYE sometimes taking home up to 25 per cent less after tax. This works both ways, though, with businesses engaging these workers on the payroll incurring similar costs.
IR35 reform poses a number of other challenges to companies, aside from the need to carry out IR35 status decisions, the major one being the shifting of the risk, which will transfer from the contractor to the fee-paying party, which is likely to be either the end client themselves or the recruitment agency when involved.
