The "Ins and Outs" of IR35

IR35

Over the last 12 months, the Trevose Partners contract desk have been updating candidate's on the progress of IR35 and how that will impact their yearly earnings. Similarly, clients are now beginning to ask us the impact this regulation will have on their business lines, and the difficulties it will pose post April 2020.

 As part of the Finance Act in April 2000, IR35 was designed to clamp down on ‘disguised employment’, to prevent contractors and others who would typically be viewed as ‘employed’ by HMRC as from being taxed is if they were ‘self-employed’.

 At present, it is not uncommon to see some contractors earning twice as much as their permanent counterparts, with the added bonus of overtime pay for extra hours worked. Those contracting via a Limited company rather than an umbrella company will typically take a small salary (minimising PAYE and NIC liabilities) and withdraw the remainder of their income in the form of dividends. NICs are not payable on company dividends.

What constitutes being inside IR35?

Several factors can determine whether the contractor fall’s inside or outside IR35. However, there are three main principals that need to be taken into account.

1. Control - what degree of control does the client have over what, how, when and where the worker completes the work?

2. Substitution - is personal service by the worker required, or can the worker send a substitute in their place?

3. Mutuality of obligation - mutuality of obligation is a concept where the employer is obliged to offer work, and the worker is obligated to accept it.

Impact on income?

The financial impact of IR35 is significant. For contractors who fall inside IR35 are subject to PAYE and so deductions must be made for income tax and national insurance contributions, which as a result can reduce net income by up to 25%. Since the legislation was first introduced, many studies have shown that a contractor earning ￡300 a day would be a staggering ￡10,000 per year worse off.

The impact on recruitment?

As manager of the temp & contract desk, we remain optimistic for the next year and strongly believe the changes could actually be a blessing in disguise. Financial institutions will always have the need to bring on contractors, whether that is to implement a new platform, a maternity cover or ensuring a firm is compliant with an upcoming regulation, SFTR for example. The scope and the budgets are not there to hire everyone as a permanent member of staff (PAYE). Subsequently, we anticipate higher daily rates to compensate the impact of increased tax implications. Either that, or we could see a higher percentage of roles released to us being advertised as a fixed term contract, whereby they bring on contractors for 6-12 months on PAYE.