Business: What new IR35 tax changes are being enforced?

• UK Construction sector braces for new IR35 tax reforms
• How will the IR35 rules impact contractors and off-payroll working rules?
• UK government has introduced new IR35 tax rules to clampdown on “disguised employment”
• The recent tax changes only apply to medium-sized and large businesses

New IR35 tax changes came into force on April 6th after being delayed for 12 months to ease pressure on firms struggling amid the COVID-19 pandemic.

However, many expect the new controversial tax reforms, formally known as off-payroll working rules, will harm contractors and self-employed workers across the UK’s private sector.

HM Revenue & Customs (HMRC) enacted the IR35 tax rules change due to signs that contractors were disguising themselves as employees to benefit from tax relief.

The new tax changes have been enforced to monitor medium-sized and large businesses more closely and ensure that only genuine contractors benefit from tax savings.

From April 6th, many independent contractors and self-employed workers operating under existing IR35 rules will now be payrolled, meaning they will have to make PAYE and national insurance contributions.

Before April 6th, independent contractors could employ staff off-payroll, and intermediaries would determine these workers’ employment status and whether the IR35 tax rules apply.

Now, firms will have to meet specific criteria to be exempt from new tax changes and businesses caught attempting to cheat the system will be subject to penalties.

Although HMRC said that they would take a “light-touch” approach to mistakes during the 2021-22 financial year, if there is evidence showing a deliberate non-compliance, firms will face heavy penalties.

Why has HMRC announced new IR35 tax changes?

HMRC introduced the new tax reform to crack down on so-called “disguised employment” as the non-ministerial department had been made aware of cases where contractors were taking on employees on a self-employed basis rather than using an employment contract.

By doing so, contractors could pay themselves dividends and avoid paying PAYE and national insurance contributions – allowing firms to make significant savings.

Disguised employment or hidden employment is a problem present in many countries. The new tax reform announced by the UK government will seek to distinguish whether individuals hired by medium and large-sized enterprises are genuine employees or not.

If employees fill permanent positions within the business, firms will no longer be eligible for off-payroll working rules, and employers must pay PAYE and national insurance.

However, the impact of IR35 tax changes  is expected to have several adverse effects, these being:

• Tax liability will transfer from the independent contractor to the end client, and as a result, work may be reduced as many clients may terminate contracts.
• As a significant proportion of contractors will become employees, this will restrict flexibility across the construction sector.
• Additional costs and issues with holiday pay claims.

While some people favour the tax changes, many self-employed workers and independent contractors fear that the new rules will lead to a more significant cost burden and increase their risks to hire.

Irrespective of whether contractors can capitalise on previous benefits or not, the tax reform will also make employers more cautious to hire extra staff, which could weigh on broader employment rates.

Under existing IR35 rules, firms could hire and release staff far more efficiently, which allowed employers to invest and manage change effectively. Employees could be quickly sourced for large-scale projects and reduced when the contact is complete or staff are no longer needed.

ContractorCalculator and IR35 Shield Chief Executive Dave Chaplin has encouraged employers across the construction sector to “hold their nerve” in the face of new rules.

Mr Chaplin also advised unprepared firms to “assess any existing contracts and consider terminating or pausing them before continuing any work.”

However, Seb Maley, chief executive of IR35 specialist Qdos, noted that many businesses had spent the last 12 months preparing for the new tax changes. Mr Maley went on to say that he expects firms that factored in the tax reform to “gain a huge advantage over those who made short-sighted decisions.”

Despite the challenges the IR35 poses to contractors, “the economic climate, the changing make-up of the workforce and the growing demand for flexible, skilled and cost-efficient workers suggest contracting is here to stay despite these changes.”

Owners of small businesses will be glad to know that they can still operate under existing IR35 tax rules. However, it’s best to double-check whether your business would be affected by the tax changes as HMRC has as a specific criterion for small firms.

Does it differ for incorporated and unincorporated businesses?

Incorporated businesses will need to have operated outside of the small company exemption for two successive financial years before applying for IR35 tax changes.

Unincorporated firms are required to apply for the IR35 tax reform from the start of the financial year that followed the calendar year the business operated outside of the small business exemption.

We suggest seeking advice from a tax expert who can offer guidance and recommendations about the best course of action to take moving forward.

What if contracts extend beyond April 6th 2021?

Unsurprisingly, some firms will have contracts that span the reform implementation date.

Technically, IR35 tax changes will only apply to payments for work undertaken on or after April 6th. However, to ensure you are compliant with the new IR35 tax rules, experts advise making sure you document all the work you undertake and complete, whether through invoices or some other form of documentation as HMRC could question any payments.

How can I prepare for IR35 tax changes even if my business might not be affected?

Experts have said that from April 6th 2021, all firms using off-payroll workers must take action due to the new IR35 rules.  If you fall into this criteria, avoid the risk of being sanctioned by actively checking whether you’re affected by the latest changes.

Even if you’re a small company, experts recommend cross-examining your records with HMRC’s criteria to ensure you are exempt from the new rules.

Can I challenge my IR35 status?

Yes, but you will need to go through a Status Disagreement Process (established by your client). However, please note that the client has no obligation to alter their decision on your IR35 status – for further information, visit HMRC’s technical guidance.