What is IR35? What the IR35 Rule Mean For Contract Workers?

Our latest blog post examines the potential IR35 amendments and how they could impact contract workers in the Tech Industry.

What Is IR35?

The IR35 legislation seeks to determine whether workers are contractors or employees of a company. IR35 was first introduced in 2000, by the then chancellor, Gordon Brown.

In 2016, HMRC estimated that there will be a £1.2 billion deficit due to contractor assignments being misclassified. To fix this, the Government brought decided to reform the legislation. Firstly, to the private sector in 2017 and now, to the public sector.

In July 2019, draft reforms for the private sector were released. These reforms are due to be implemented on 6th April 2020.

However, the Association of Recruitment Consultancies commented,

“The original public sector implementation has yet to be reviewed. It had been due to be reviewed by the Treasury Select Committee. But this was cancelled due to the last General Election.” 

The Association of Recruitment Consultancies

In September 2019, the Institute of Chartered Accountants, England and Wales, also commented. They were firmly in agreement that the date should be delayed until April 2021.

What Does This Mean For Contract Workers?

The reform draft focuses on who is responsible for making decisions. Principally, the determination of whether a worker’s assignment falls ‘inside’ or ‘outside’ of IR35 – is the assignment PAYE or B2B.

Previously, this responsibility was on the worker, now it is up to the client to decide. This means that if a contract worker is found to be inside IR35, they will be taxed. Thus they will be expected to pay NI as all employees do. However, these workers won’t receive employee benefits.

The HMRC has made it quite clear that it will issue fines for failing to adhere to the new regulations. It will also be chasing for any ‘unpaid’ taxes deemed payable under the change in regulations.

Storms ahead: How will IR35 Impact The Tech Industry?

• 44% of clients believe that the legislative changes will force current contractors to look for permanent employment.
• 11% of clients are preparing for an increase in contractor costs. (Be.IT)

CW Jobs held a ’roundtable’ event in January of this year to discuss the implications of these changes. It was concluded that many companies were concerned about changes to IR35 in the private sector. Their main worry is that the changes could lead to a further shortage of skills in the IT industry.

On the other hand, whilst the IR35 reforms may impact the Tech Industry negatively, they may also bring some benefits. For example, it is highly likely that the reforms will reduce the number of job seekers seeking contracting roles. Therefore, direct employment opportunities may increase.

A Cloudy Start: The impact of the General Election…

Crucially, the General Election has seen both Labour and Conservatives announce that they’re going to review the legislation change.

Shadow Business Secretary, Rebecca Long-Bailey, said that Labour will “look at” the 2020 reform, to seek a “fairer” replacement. She stated, “The system is certainly not fair and it’s causing a lot of anguish to those who are self-employed.”

However, such a review of 2020’s off-payroll framework is absent from Labour’s manifesto. It fails to feature in the party’s new ‘20 pledges for Small Businesses’, proving a very cloudy forecast for IR35.

By contrast, the Conservative’s have also pledged a similar stance. Would-be Chancellor of the Exchequer, Sajid Javid has promised to review the extension of IR35 to the private sector. That is, of course, if the Conservative Party wins the General Election on 12 December.

In an interview for BBC Radio 4, he stated made the following statement:

“One thing, in particular, I want to look at is the proposed changes to IR35… I want to make sure that the proposed changes are right to take forward. So we will be having a review of those proposals and changes as part of our wider self-employment review”.

Ex Chancellor of the Exchequer, Sajid Javid

However,  observers have noted that there is no mention of this in the party’s manifesto, making it an ‘uncosted’ pledge. Labour had also failed to address this point.

Outbreaks of sunshine: It’s not all doom and gloom!

Many companies are already starting to plan how they’ll fix the skills gap left by the absence of contract workers. For example, companies are focusing more of their efforts on attracting young people. In order to achieve this, they are offering flexible working, ongoing training and graduate schemes. Arguably, a positive for any budding developers looking for a foot in the door.

In March 2019, TV Presenter Lorraine Kelly won her case against HMRC for alleged unpaid taxes of £1.2 million. HMRC argued that Kelly had claimed her agents’ fees were tax-deductible. However, as an employee of ITV she was not entitled to such claims.

Despite this, Kelly won her battle. Judge Jennifer Dean agreed that she may be classed as a freelancer. This is based on the grounds that she does not receive sick pay or a pension from ITV. Nor does she have any guarantee that her contract will be renewed. This ruling seems to suggest that there may be some room for negotiations if you are fined by HMRC.

It is worth noting that this is a draft bill. The bill is still being processed through Parliament. This means that changes could still be amended IR35 provisions before the bill comes into force.

Feeling a little wind-swept?

If you’re unsure about what IR35 means for you or you’re weighing up contract vs permanent employment, why not talk to one of our friendly recruiters? We are available to talk on the phone or by live chat. So if you have any quick-fire questions, just click on the icon in the bottom right corner. Our consultants will be happy to help.