IR35 Reforms: How will the changes affect you?

  • March 2, 2020

Despite pressure from many professional bodies on the new Chancellor, Rishi Sunak, to suspend the roll out of the off-payroll working rules (commonly known as IR35), into the private sector because of the potentially damaging affect it might have on the economy, they are still due to come into effect on 6th April 2020.  The Chancellor has however stated that officials will not be ‘heavy handed’ in enforcing the law for the first year amid confusion and uncertainty.

The new law will require companies who meet two or more of the following criteria –  (i) more than 50 employees or (ii) £10.2m annual turnover or (iii) a balance sheet total of more than £5.1 million – to assess the employment status of any person they engage with. Companies and their recruitment agencies will be liable for unpaid tax if HM Revenue & Customs finds that a worker has been wrongly classified.

What will the reforms mean?

Currently, it is the workers responsibility to assess their own status, but from April 2020, it becomes the responsibility of the client to perform an assessment on the role and decide whether it will be deemed ‘inside’ or ‘outside’.    The main tool associated with this is Check Employment Status for Tax (CEST), designed and backed by HMRC, but there are other tools available on the market.

Those who are classified as ‘Outside’ IR35 are generally thought to be legitimate contractors operating in most cases as self-employed via their own limited company. They have the responsibility for ensuring they are paying the right amount of national insurance and tax and are not subject to PAYE.  If someone is deemed ‘outside’ after April 6th, then there will be little or no change for them.

Those who are classified as ‘inside’ IR35 will be expected to pay the same amount of tax and national insurance as a permanent employee would pay; they are subject to PAYE. This is a real kick in the teeth for contractors, as despite paying the same amount in tax as permanent employees they will still not be eligible for holiday pay, sick pay, or other benefits that permanent employees receive, nor do they have the job security of a permanent employee.  While this has always been the case, it now means the benefits of contracting have reduced dramatically.

Depending on their motivations – financial or flexibility – with the introduction of these changes, we have seen more contractors open to permanent opportunities, if it is financially viable for them, so they can reap these additional other benefits.  However, many prefer contracting because it gives them flexibility in where and when they can work and gives a level of freedom when moving onto new opportunities; and it is these people who will be the most affected.

How are these changes being handled?

Many large organisations or US owned corporations have taken the decision to err on the side of caution and have been placing many contractors inside, as incorrectly assessing someone as outside can potentially leave them at risk of an enquiry from HMRC.  The bad press as a result of this could seriously damage the reputation of their brand/organisation.  We have also seen some large banks put a ban on engaging with contractors in any capacity for the very same reasons.

It may surprise you to learn that there are still Clients out there who are yet to communicate their plans to the agencies they work with.  With only draft legislation available as a point of reference, many Clients are putting off their decision in case major changes are announced, but with the final legislation expected to be released shortly after budget day (on 11th March 2020), they run the risk of losing talent they currently have due to the uncertainty around their status.

HMRC have already released an update on 7th February 2020 to announce that to avoid confusion, the reforms will only apply to services after 6th April, and not payments after this date, as they originally planned, so it is unlikely any further changes will be made to the legislation.  Still, this has provided contractors with a few extra weeks breathing space while some Clients are still putting plans together.

What dos the future hold for the UK recruitment industry?

When the reforms were introduced in the public sector in April 2017, we saw a large influx of contractors leaving and moving into the private sector, but this won’t be an option when the reforms are extended into the private sector.

If a contractor wishes to remain ‘outside IR35’ then they may find themselves working for companies classified as ‘Small Businesses’ – those below the thresholds mentioned above, who may not have a great deal of work.  They may also face increased competition to even get considered for a role.  All this could potentially bring outside rates down, as some contractors may be happy to accept a lower rate of pay to be able to stay outside, with its associated benefits.  At the other end of the spectrum, we have already seen rates for inside roles increasing as clients are keen to retain or attract the best candidates.

Whether you are a client, an agency or a contractor, the changes from 6th April 2020 will be a headache for everyone, but there was the same fear and feeling of trepidation when IR35 was introduced into the public sector, and they have proved that life goes on!  Yes, there was an initial knee-jerk reaction that saw a big loss, but three years on there is still a large contract workforce and this way of working has become the new normal in that sector, just as these changes will become the new normal across the private sector too.

With big changes ahead providing lots to think about, 2020 is a bit of an anomaly for the IT recruitment market. We are optimistic about growth and opportunities, and looking forward to working with candidates and our clients to create more perfect matches. To discuss your next role, or your talent requirements, contact our office to see how we can work together.

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