How will the IR35 changes affect small businesses?
If you’re currently hiring people on a contract basis then there are some tax changes HMRC are pushing through that will potentially affect you from April 2020. Here’s our guide to what’s changing, why and how it will affect you.
What is IR35?
IR35 is a piece of legislation that governs how contractor tax should be calculated.
Why should I care about my contractor’s tax?
The new legislation means that any company hiring contractors will be responsible for checking their IR35 status.
What’s the current situation?
Contract and permanent employees currently pay their taxes in different ways. Contractors typically take their earnings as dividends and pay a lower rate of tax (known as “off-payroll”). The existing intermediaries rules oblige individual contractors to assess their own employment status and apply PAYE deductions if they deem themselves to be within the scope of IR35. For obvious reasons many people would consider themselves outside of IR35.
What changes are coming?
We’ve known that this was coming since the 2018 Autumn statement. The changes are largely in-line with those rolled out across the public sector so companies and contractors have had time to prepare. For any payments made after the 6th April 2020 the client will be required to assess if the role should be treated as within, or outside, the scope of IR35 instead.
It’s important to note that these rules only apply to medium and large companies. If you qualify as a small company then you will not be affected. The Companies Act 2006 defines a small company as meeting at least two of these qualifying requirements:
- Turnover less than £10.2 million
- Balance sheet less than £5.1 million
- Less than 50 employees
What do I need to do now?
If you currently meet the criteria of a small business then you do not need to do anything. If, however, you potentially could meet that criteria soon you may want to prepare anyway. If that’s the case have a look at our blog post dedicated to medium and large companies.
What effect will the IR35 changes have on my business’ ability to hire contractors?
There is a possibility that it might actually make it easier for you to hire contractors. Small businesses will be the last type of company where the contractor can decide for themselves if they’re within IR35 or not, which might make it more attractive. The important thing to remember is that what is considered within and outside the scope of the legislation hasn’t actually changed. Someone who will be considered caught by the legislation in April 2020 is also technically caught by the legislation now. The only change is who is assessing the contractor’s status and who is financially liable for any unpaid taxes. People prefer to be in control of their own financial arrangements and some contractors may consider the risk of being caught is low in comparison to the cost of PAYE taxes and prefer to continue with their own limited company.
Everyone thought that the public sector changes were going to be catastrophic to the contracting industry but it wasn’t. Yes there will be some slight changes but contracting is still a working model that works well for so many people. That’s not going to change just because of a shift in legislation.
Victoria is the Office Manager here at Corriculo Ltd. After working as Recruitment Consultant for 5 years, she moved into Office Management over 11 years ago now. Victoria was one of the first members of our team and deals with all of our administration and accounts. Connect with her on LinkedIn