IR35 came into effect in 2000 but in recent years it has undergone a major overhaul. In April 2017, changes to off-payroll in the public sector had a major impact on contractors, recruitment agencies, payroll providers and private sector organisations. This legislation is now going to be rolled out into the private sector in April 2021. Failure to prepare could have a devastating impact on accountancy practices who have a large number of contractors and freelancers on their books. However, Churchill Knight Umbrella has the perfect solution.
Keep reading to find out more about IR35, off-payroll legislation and our proposal to help your business cope with the rapidly approaching changes.
IR35 was introduced by HMRC in 1999 and came into effect in 2000. The legislation was designed to stop ‘disguised employees’ underpaying tax and National Insurance Contributions (NICs).
Genuine contractors working through a limited company are able to pay themselves with a combination of salary and dividends – an arrangement that is more tax efficient than PAYE. However, HMRC identified a number of disguised employees who were taking advantages of this tax break, despite working on the same roles as people in permanent employment (who were not able to benefit from the same tax breaks). The only thing that was different is the fact they were working via an intermediary (in most cases, a limited company, also referred to as a personal service company).
Off-payroll in the public sector
Up until April 2017, all contractors – both public and private sector – were able to determine their own IR35 status and pay themselves accordingly. However, in April 2017, new rules were introduced called “off-payroll in the public sector”. These meant that contractors in the public sector had to rely on their end-client to determine their IR35 status for a contract, and they no longer had the freedom to determine their own.
Off-payroll in the private sector
Off-payroll legislation will be adapted and rolled out into the private sector in April 2021 (off-payroll in the private sector). Similarly to the public sector, contractors and freelancers will not be able to determine their own IR35 status after April 2020. Instead, they’ll have to rely on their end-client to give them an accurate and fair assessment. However, this only applies to contractors and freelancers working for large and medium-sized end-clients (unlike off-payroll in the public sector that applies to all-sized businesses).
How will accountancy practices be impacted by off-payroll in the private sector?
As we witnessed after off-payroll in the public sector was introduced a few years ago, the upcoming changes to the private sector will heavily impact accountancy practices like yours. Here are a few things that you must take into consideration:
- Many private sector contractors (possibly up to 80%) will be required to use an umbrella company for their payroll in the build up to, or shortly after April 2021. This is likely to be caused by their end client initially taking a blanket approach to IR35 assessments and deeming every temporary worker as inside. Although this may not be “fair”, we spoke to plenty of contractors who almost overnight were told they needed to use an umbrella company because they’re suddenly “inside IR35” (after off-payroll in the public sector came into effect).
- However, just because a limited company contractor using your service is told they need to use an umbrella company, it doesn’t mean their limited company will become obsolete.
- Once time passes, private sector organisations are expected to become more accustomed to off-payroll legislation and may create positions that are listed as either “inside” or “outside” IR35. This will encourage some contractors to seek roles outside IR35. This is what happened in the public sector – roles started to be advertised as either “inside” or “outside” IR35.
- If you do not prepare your clients for what is coming, they may be angry with their end client, recruitment agency and your accountancy practice. After all, their take home pay could potentially be reduced by up to 25% and wouldn’t you be annoyed if this happened without any prior warning and time to prepare?
- By providing your contractors and freelancers with information on the upcoming changes and a solution that will eliminate any confusion and help them understand their payroll, you will be able to hold on to them well beyond April 2021.
- Partnering with an umbrella company does not mean you are losing your clients. Instead, you are providing them with a temporary solution to their payroll whilst they either look for roles outside IR35 or their client has time to correctly assess their contract role.