Recent reforms that concern IR35 for self employed workers can be problematic for many companies using contractors.
“The rules make sure that workers, who would have been an employee if they were providing their services directly to the client, pay broadly the same Income Tax and National Insurance contributions as employees. These rules are sometimes known as ‘IR35’”.HM Revenue and Customs
Furthermore, a recent change in the legislation will now put the responsibility to determine an IR35 status of contractors on private companies . Thus, this responsibility means companies need to determine whether contractors should pay tax and national insurance contributions (NIC).
The thought process behind this legislation is to combat unfair tax avoidance in the labour market and increase tax revenue. However, the downside for businesses is that it will require a vast amount of time and money to involve a worker in short term projects.
There are also significant disadvantages that IR35 poses on workers. Furthermore, where workers fall under IR35, they may not receive some employment benefits. This is an issue as it makes their situation worse than that of a regular employee in that they will have to pay more costs.
There have been some very high case IR35 stories in recent years. One of which involves TV personality Gary Lineker. Read the full story.
Hiring Contractors – Advantages
One benefit for companies hiring contractors is that they can acquire assistance for specific needs over shorter periods of time. Furthermore, the relationship is flexible and a company may terminate it whenever it is necessary to do so. Upon termination, businesses must pay a fee to the worker’s limited company but benefit by not having to pay worker taxes and NIC’s. They instead will pay corporation tax rate for profits, which are lower than income tax rates.
Where workers do not fall under the rules of IR35 for self employed contractors, there are a number of benefits. The positive side of receiving pay through a limited company is that contractors may pay themselves through dividends. Thus, they can avoid NIC’s.
A final benefit can arise for workers who fall under IR35. If a lower income worker falls under IR35 and then hired as employees, they may benefit from additional protections such as company pensions.
Hiring Contractors – Disadvantages
Issues surrounding IR35 for self employed contractors arise when hired on an ongoing basis. Where a business may employ contractors on a longer basis, workers may want the benefits that come with employment such as company sick pay. However, in receiving these benefits they fall under IR35. This is because the company is treating them as regular employees without paying taxes and NIC’s.
In addition, the clear disadvantage here for companies is that where workers fall under IR35 they will have to pay more taxes and NIC’s. Furthermore, termination of contractor relationships may also be more costly.
Similarities in Europe
Similar legislation to IR35 for self employed workers is also present in other parts of Europe. However, these forms of legislation have not been so successful in the past. For example, similar legislation in the Netherlands resulted in an enforcement moratorium being put in place as it caused too much uncertainty for those involved. Similar legislation is also active amongst many other countries.
One sector affected by IR35 is the construction sector. Find out more.
Moving forward we may see the emergence of more umbrella companies. Umbrella companies work by hiring employees who are then provided to businesses to work on a short term basis. Thus, this will allow businesses to hire contractors in a similar way as before but without the restrictions of IR35.
However, the use of umbrella companies can be seen as unethical in some cases. Furthermore, this is because umbrella company workers do not receive employee benefits such as company sick pay.
In addition, may give up trying to hire contractors completely and only hire employees to avoid the risks involved with IR35 for self employed workers. From a business perspective, this may be costly as employees would need to be hired even for short term projects.
The confusion surrounding IR35 for self employed contractors might lead to further demands for the government to take action. Some businesses are calling for the government to standardise contractor agreements as set out within IR35 legislation to help prevent this confusion.
For more information regarding IR35 and for further HR support, contact us.