Tax deadline looms for contractors
IT isn’t a new debate but the friction over IR35 changes continues, heating-up nicely for April when HMRC’S tax police introduce hard legislation. Changes? Ah, well, that’s just part of the problem. No less than a third of private sector organisations in Scotland who engage non-permanent contractors or temporary workers are unaware of IR35 reforms that are on the horizon. That’s according to a fresh temperature check by researchers working with recruitment gurus Hays.
So, a quick summary may prove useful – even essential, if you’re an employer or a ‘self-employed’ individual (it could therefore impact a micro company structure) keen to avoid the wrath of the authorities in just a few weeks.
The IR35 reforms, already enforced in the public sector for the past three years, are aimed at tackling perceived tax avoidance by interposing a Personal Service Company (PSC) to ‘mask’ what the Revenue argues is in fact an employee and employer relationship. Enforcement of legislation for the private sector in April is for medium and large-sized organisations.
As the UK Government’s antitax avoidance rule, it was highlighted to private firms at the start of this year that measures would become law for the next tax period.
It is most likely to affect the IT, construction and property, and financial services industries.
In the IT and financial services segments these are frequently professional posts where the individual works as a self-employed contractor.
I have to say that for years, well before the PSC abbreviation entered the language, it has been the case that unless a contractor can demonstrate other regular (a grey area, that one) contracts/ clients than one big one, then they are not actually self-employed in the strictest sense.
Realistically they are an ‘employee’ of the organisation in question – but one who is not within the core headcount, not having their tax paid at ‘employer’ source, not part of the ‘employer’s’ pension liability nor its National Insurance payment arrangements.
In those scenarios (assuming all is above board – and remember, HMRC says it isn’t in too many cases) the employer saves money and, perhaps, so does the ‘contractor’.
That’s avoidance by the employer, in HMRC parlance.
Other important segments of the economy could be affected, typically but not exclusively involving professional job descriptions.
Coming back to Hays’ research – part of its 2020 salary guide, that alarming 33% statistic is joined by another: 49% of employers in the latest catch category say the changes will make it much harder to hire temporary workers.
Shorthand for cutting shortterm recruitment, maybe? I suspect that’s unlikely in pure numbers, but it could impact the – let’s call it ‘genuine’ – short-term contractor market which suits many micro or one-person businesses for its flexibility.
On the one hand you could say that this measure also protects those people, be they back door ‘employees’ or something else. They’ll get recognition for pension, holiday and sick pay as well as other rights.
On the other hand, professional contractors tend to be paid more while taking care of their own tax and NI situation – the latter also possibly to their advantage.
I’d temper that last assertion, though. It’s worth remembering that in many sectors, unless an individual is a rare expert or technology-era in-demand specialist, in real terms daily fee rates aren’t what they were before the 2008 financial crash, despite some recovery.
Akash Marwaha, Hays managing director in Scotland, cautions businesses on the tight timing they now face in order to comply.
“The timeframe between the review and the reforms coming into effect is very short, so it’s important for employers to act now to ensure they are aware of how these changes will affect their business,” he says.
“The first thing to determine is whether an assignment falls inside or outside of the IR35 rules. If the assignment falls inside of IR35, the person will be treated as an employee with PAYE and NIC deductions applied. It can be quite complicated to determine the tax status of each assignment.”
It almost goes without saying that these changes are controversial, and are likely to have major implications for both workers and PSCS.
Marwaha adds: “Our research in Scotland showed that 83% of employers see the biggest risk of IR35 to be potential cost increases. However, the loss of key talent is also a big concern, especially for organisations that require niche skills.
“For employers, the changes will impact on how they recruit. And for professionals it will affect their income, which may possibly decrease.”
In 2017, when the IR35 reforms were hastily introduced in the public sector, Hays points out that a number of issues emerged as highly skilled workers were lost to other organisations who were more prepared, reputations were damaged, and some projects were scrapped altogether. The private sector has had a bit more time to prepare, it contends.
“Preparation is key,” Marwaha continues. “Anyone who hasn’t done a review of what it means for their capacity should do so now, especially given how tight the labour market is.
“They need to start communicating with their consultancies and freelance workers, renegotiating working arrangements, standardising onboarding procedures and deciding if any specialist skills need to be brought in-house to get projects over the line.”
There is no prospect that HMRC will tolerate an insubordinate approach from firms who cry foul on flimsy evidence.
The loss of talent is a big concern, especially for organisations that require niche skills