IR35 what is it and what it has done to the industry?

The Off-Payroll Working Rules, known widely as IR35, is a limited company focused piece of tax legislation that is designed to combat tax avoidance by workers, who are supplying their services to clients via an intermediary such as a limited company; but who would be an employee if the intermediary was not used. Falling foul of legislation can have serious consequences and remove many of the financial benefits of contracting; but by adopting some simple measures and adopting IR35 best practice, you should be able to avoid handing over more of your cash to the taxman than you need to.

If a service is assessed as inside IR35, contractors will need to pay the same income tax and NIC’s as it they were employed and taxed under PAYE.?This is often less appealing as, despite this, contractors are not entitled to employment benefits such as sick leave and holiday entitlement.

IR35 has had a significant impact on self-employed limited company contractors and companies (clients). Confusion from some companies around the actual rules and regulations are adding a level of uncertainty to their hiring process and this is unsettling for resources. Self-employed contractors are having to decide on whether they wish to work via umbrella (inside IR35) companies and be taxed directly at source; or to operate via their own limited companies outside IR35.

The disadvantages that hiring organisations have been threefold.?

1. They are paying a lot more for inside IR35 skills as contractors are having to get their umbrella companies to pay their taxes yet wanting to earn the same or close to where they were before the change in IR35 regulations, which in many cases is not sustainable.??

2. Companies are not able to attract the skilled resources as self-employed contractors are attracted to outside of IR35 contracts.

3. The number of available contractors has significantly dropped, and previous contractors are now working in FTE roles.

Some companies initially took a hard stand on how they procured their skilled contractors with a blanket approach of all resources being inside IR35 and some companies only paying at rates equivalent to those paid before the change in regulation in April 2021. This has forced some contractors to take a significant pay cut or turn to full-time employment.?

This can cause significant delays to the projects/ programs that companies are trying to deliver and has the potential to increase spend considerably. One of my clients recently shared their experience of how they had struggled to attract the correct skilled contractor to support key projects; and that this was made even more challenging by their small internal headcount and paying below the market rates for inside IR35. Here at idpp we were able to educate the customer around the regulations, provide examples of what they can get at different levels and share market trending to allow the requirement to be fulfilled.?

It is my belief that these regulatory changes are here to stay, and as we face the challenges of acclimatising to these regulations, it is more important than ever that contractors, clients and hiring companies are aware of the pitfalls and are adequately prepared, as the consequences can be catastrophic. Feel free to reach out if you wish to have a discussion and I will be more than happy to help.

Mandy Sunner MIRP

Divisional Director – Telecoms and Work Package Services

[email protected]