HMRC warning: Businesses are not ready for IR35 ‘judgement day’ – self-employed to be hit

Budget 2021: Rishi Sunak outlines support for self-employed

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IR35 changes involve the alteration of tax legislation, with the changes set to affect off-payroll workers. Going forward, off-payroll workers will need to be treated as full-time employees from April 6 and medium to large sized businesses will be responsible for setting the tax statuses of contractors they hire.

This will mirror a system that’s been in place in the public sector since 2017 and while the treasury expects the changes to raise around £3billion for the Government’s coffers, many have warned it will create administrative and costly problems for the workers involved.

These problems were highlighted yesterday by Grant Thornton, the business and financial adviser.

In a survey of 605 “senior decision makers” from mid-market businesses conducted in late January, it was found that over one in three (38 percent) of respondents are not ready for the transition.

Additionally, 13 percent revealed they had done only “minimum preparation” or were in the early stages of planning, with a further 25 percent detailing they had preparations underway but were simply not ready for the deadline.

Dave Chaplin, the CEO of contracting authority ContractorCalculator and IR35 Shield, reviewed these findings and commented on what problems could be on the horizon: “To any hirer that is not ready for IR35 Judgement Day on April 6 I would say it’s time to terminate your contracts with your contingent workers now or else you could have a mess on your hands as well as significant additional costs to bear.

“As a precautionary backstop, give your contractors notice, get your strategy and due processes in place and then start assessing your contractors under the new rules and with new contracts.

“Any contract which overlaps and continues after April 6th, for which the client hands an ‘inside IR35’ assessment to the agency, will generate a considerable extra unplanned cost for the agency.

“The agency will incur 13.8 percent employers NI on top of the contract rate, which they will have to fund because it cannot be lawfully deducted from the contract rate.

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“For the client, if the contractor is ‘inside IR35’ and they have not passed the determination to the agency, they become the ‘fee-payer’, and worse for them, due to an inherent legislative flaw, the money passed to the agency must be treated as employment income, which means a new Employers’ NI bill of 13.8 percent would be due on top.

“For contractors who are ‘outside IR35’, the issue does not arise.”

The IR35 changes are also set to impact willingness to work within the self-employment sector itself.

Recently, the Association of Independent Professionals and the Self-Employed (IPSE) conducted their own research which found half of freelancers are planning to stop contracting in the UK after the changes to IR35 come into effect, unless they can get contracts that are unaffected by the changes.

Instead, these freelancers are planning to take the following actions as the new tax year starts:

  • Seek contracts abroad (24 percent)
  • Stop working altogether (12 percent)
  • Seek an employed role (17 percent)
  • Retire within the next year (11 percent)

This research also revealed results similar to what was found by Grant Thornton, with 24 percent of respondents detailing their clients were either uncertain or had made no indication of what they would do in response to the IR35 changes.

Additionally, 24 percent said their clients were planning to blanket-assess all their contractors as “inside IR35” and one fifth (21 percent) will only engage contractors working through umbrella companies.

Nearly one in ten contractors (eight percent) said their clients were planning to cease engaging contractors altogether.

As a result of these findings, IPSE called on the Government to delay making the changes to IR35 with Andy Chamberlain, the Director of Policy at IPSE, commenting on this: “The pandemic has done disproportionate financial damage to the self-employed sector: after this, it simply cannot take the added hit of the changes to IR35.

“This research shows that not only are a large proportion of businesses not ready for the changes: many others are responding by either ceasing to engage contractors altogether, or forcing them inside IR35 or into umbrella companies – both of which will slash their incomes.

“It is not surprising, therefore, that so many freelancers are reconsidering their prospects in the UK workforce – either planning to close their businesses or take them overseas. In recessions more than any other time, the UK needs its freelancers: their innovation and dynamism have historically always been the kickstarter to get the economy out of downturns.

“Pushing ahead with the IR35 changes now would undermine this vital sector just when the UK economy needs it most. Therefore, for freelancers, the businesses that engage them and for the UK economy, we are urging the government to delay and rethink the changes to IR35.”

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