IR35 was introduced in 2000, so it's going to be 21 this year. In a nutshell, IR35 says that, insofar as your limited company’s revenue comes from you really being a pseudo-employee of an end-client, you can’t use the tax and National Insurance efficiencies of dividends – the company’s got to pay more or less all of that revenue out to you under PAYE.
Simple in theory, a complete failure in practice. A company’s director had to make the call on whether IR35 applied and whether far more tax and NI should be paid, so there was a big financial incentive to argue they were outside it, and HMRC lacked the resources to police the rules in any meaningful way at all. And, in any case, the question of what represents an employee-esque relationship is often impossible to answer with certainty. In the modern world, countless people sit in that grey area somewhere between employment and self-employment.
So, IR35 was to all intents and purposes a failure. In 2017, the government changed it a little. If your customer was a public body – an NHS Trust, for example – then the decision was taken out of your hands, and the public body would decide if IR35 applied. If they decided it did, they’d effectively take your company’s invoice, work out and deduct full employment taxes, and pay whatever remained, to put you more or less on a par with a PAYE employee. This was effective in one sense – a lot of public bodies did apply the rules in that way – but had the unintended consequence that many of the better contractors just decided to move into the private sector and work there instead.
As a result, the government had a second idea. From April 2020, those same rules would apply to big private sector companies too – they’d have to make the IR35 call themselves, at their own risk, and if they paid pseudo-employees via a limited company gross then the risk of employment taxes not being paid would be their own risk, not that of the contractor. This was actually quite effective, and a bunch of big companies stopped using contractors entirely, either putting the workers on to PAYE or just outsourcing that PAYE processing to an umbrella company (technically they could go down that previously described route of deducting employment taxes from your company’s invoice, but there’s no real point, PAYE is an easier way of achieving the same result).
Then COVID happened, and the April 2020 introduction was postponed by a year. The big companies who’d played ball and got ready for the new world found they could have got away with another 12 months of using contractors. The big companies who buried their heads in the sand did get away with it.
But the change is still due to come in this April instead, so hopefully those latter companies have removed their heads from the sand and are getting ready to engage with it. There’s a chance it could be postponed again, of course (the government have form over the last couple of years of very short-notice postponements of changes that businesses have spent a lot of time and money preparing for, even prior to COVID), but it seems unlikely, and it’s clear that it’s being talked about more this time round. However, what that means is that you do hear a lot of things being said about it that aren’t accurate at all, such as:
- “IR35 is being introduced in April”. No it’s not. IR35 has been around for more than two decades. All that’s happening is the responsibility of non-compliance is being shifted from the contractor’s company to its customer, if the customer is big.
- “You can’t take on a contract if it’s under IR35”. IR35 has never had anything to say about whether a contractor’s company can accept an engagement or not. It’s legislation about how a contractor must get paid by their own company.
- Crucially – “It’s more risky to be a contractor from April”. There might be fewer contracts around, that’s true, with more of those gigs being offered on a PAYE basis instead. But if you’re a contractor working for a big company, and they’re content to continue paying your company’s invoices in full, there’s *less* risk than before, as the customer now bears the burden of non-compliance. There may well be some ultra-cautious contractors who decide to declare under IR35 anyway, even if their customer is happy to pay gross, but HMRC are going to be going after the end user in the first instance, not the contractor. Anyone in that situation will clearly be at less risk than they were before, not more.
- End users of contractors telling contractors “there are some changes coming in April, you should look into them.” Er, no, *you* should look into them. This is a transfer of risk *from* contractors *to* end users. The end users are the ones who need to understand what’s happening.
What is certainly true is that some contractors are going to find themselves taking PAYE jobs instead. And what’s also true is that many of those people will find themselves earning less money than they used to. Some of them will be able to ask for, and get, a bigger daily rate in order to make up for it, if they have particular bargaining power for some reason, but many won’t, as their fundamental value to their client/employer hasn’t changed.
There are two ways of looking at it, really. Some contractors will be phlegmatic about it, considering they’ve done well for a while, and that now finding themselves with a tax burden on a par with that of an employee isn’t the end of the world. And some contractors will not be phlegmatic about it at all, especially if their life involves overheads more or less equal to their present net income. But it is what it is, and even if the change is postponed for a second time, it will come. The tax system isn’t fit for 2021 in many respects, and the vast number of contractors using limited companies simply wasn’t contemplated when the fundamental levers of corporation tax, income tax and National Insurance were first created.
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