IR35 reforms are coming: what you need to know
Changes to IR35 legislation are coming into effect in April 2020. IR35 legislation is designed to target “disguised employment” between firms and freelancers. This is where a company hires freelancers and contractors to undertake work, yet they are effectively employees of the company. It also affects freelancers who operate as sole traders or limited companies. The change in 2020 shifts the onus onto employers in relation to proving the contractor’s self-employed status.
Who will be hit the most by the changes?
Many industries rely heavily on freelance workers. The trade off is simple – the more freelancers operating in a sector, the heavier the effect. In a document published in 2018, HMRC predicted that 90% of freelancers who fall within IR35 are not complying with the existing IR35 rules. It’s clear that from April 2020, private sector businesses will need to do more to comply with the legislation.
What are the critics saying?
The general view is that the reforms will increase burdens and costs on businesses during a time of uncertainty and change, whilst also having to comply with many other acts of legislation that are evolving in all areas.
The fact that HMRC have lost a number of tax tribunal cases surrounding IR35 also illustrates the point that there is a possibility for different conclusions to be reached on the same facts and for tribunals to even take opposing views against HMRC.
So, as we can see, the influences of IR35 are not quite as definitive as HMRC would like.
How can a firm protect themselves?
HMRC has a tool named CEST that determines whether an individual should be classed as employed or self-employed for tax purposes although concerns have been raised around the tool due to its rate of accuracy. HMRC says that the tool arrives to a conclusion 85% of the time, leaving 15% of cases pending further investigation.
There has even been debate between HMRC and professionals around the validity of those percentages. This is further highlighted by a number of high profile cases involving television hosts and broadcasters that have gone against HMRC.
Here are a few extra tips to make sure your firm is compliant:
Develop a robust process for recording the use of freelancers centrally.
Determine how those contracts are being carried out.
Use CEST as a starting point. CEST can be very black and white, however, so it’s best to also develop a back-up process.
Identify who IR35 will apply to and make sure they’re trained to comply.
Monitor each freelancer’s status and re-run status determinations periodically (every 6 months is a good rule of thumb).
Ensure that there is an appropriately drafted contract for each engagement which reflects the working arrangements and status determination. This will give the business the right to deduct PAYE and employer NICs from the fees if required.
Decide which freelancers are critical to the business and for whom the business is prepared to pay extra due to IR35.
Consider looking into business processes to determine if any changes are required.
With over 1.4 million British freelancers working across all sectors, IR35 is set to affect many working relationships all over the country. Making sure your firm is compliant with the changing legislation is critical to avoiding any HMRC investigations.
For more expertise on changing legislation in the world of tax, don’t hesitate to get in contact. We’re here to help.