Change is coming to contract work in the United Kingdom and its impact has already been felt by some organizations. IR35 has been in place for over 20 years, but legislative reform comes into play in April 2021 to broaden the impact of the regulation. So how will these IR35 changes affect UK businesses? And how can you know if you will be impacted?
Read on for answers to your burning IR35 questions.
What Is IR35?
Firstly, we need to address what this legislation actually means. IR35 was originally announced in 1999 and put into place by Her Majesty’s Revenue and Customs (known throughout the UK as HMRC) in 2000.
As concerns rose around the “Millenium Bug” in 1999, many organizations were making a significant increase in their contingent workforce and non-employed staff, particularly in technical and IT roles. This is what triggered its initial implementation in 2000. It was brought in to ensure “disguised workers” were taxed properly under UK tax law.
A disguised worker is someone working with an organization in the capacity of a contractor, consultant, or freelancer but operates in the same way as a permanent employee. So, for example, they may report to a direct line manager, use company hardware, have an allocated seat in the office, follow organizational standards around lunch breaks and working hours, etc.
However, as they are registered as part of a limited company or operate as a contractor, consultant, or freelancer, there are tax loopholes that allow them to pay significantly less tax on their income than a permanent employee.
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What Is the 2021 IR35 Reform?
Originally meant to be implemented in April 2020 but delayed due to the global pandemic, the 2021 IR35 reform sees a major shift in responsibility. Under the original IR35 legislation, it was down to the contractors themselves to declare their employment status and determine whether they fell inside or outside of IR35.
As of April 2021, this responsibility will now sit with their employer. There is, however, an exception for small businesses.
What Is the IR35 Small Business Exemption?
Under the IR35 reform, small businesses are exempt from taking on the responsibility of tax calculation and implementation in order to reduce administrative burdens. To be classified as a small business under IR35, you must meet the following criteria over a 12-month period:
- Have an annual turnover of £10.2 million or less
- Have a balance sheet total of £5.1 million or less
- Have no more than 50 employees
Any contracts engaged by small companies, as per the above criteria, will continue to operate the IR35 rules as they currently do. Therefore, responsibility for determining employment status will not pass on to their clients or employers.
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How Will This Impact Employers?
The first point, and perhaps the most obvious, is that employers will need to assess, individually, every contractor role they currently have in place. In other words, you will need to assess whether this role falls inside or outside of IR35. It may seem more efficient to have a blanket rule for everyone, but this could result in mass walk-outs and significant loss of staff.
The second thing to consider is how this will impact staff attraction and retention. For organizations that engage high-value contract workers, roles that fall within IR35 will see the biggest hit. A contract worker who is classified as within IR35 will see a dramatic increase in their tax rate, which may lead them to seek contracts elsewhere.
For example, several UK banks made blanket decisions to not employ contract workers outside of IR35, leaving contractors a difficult choice to work with those organizations: become a full-time employee or be taxed under IR35.
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What Should Employers Do?
At its core, IR35 is quite simple. However, the ways in which it will impact organizations are much more complex. Employers will need to have a clear strategy if they want to continue to engage with contract workers. As well as assessing the status of your current contract roles, you will be required to review your needs on a role-by-role basis to help determine whether a contractor falls in or outside of IR35. A vendor management system (VMS) can provide an advantage to employers by enabling full visibility into their contingent workforce.
There are many online tools available to assist with these determinations, including one from HMRC itself. The HMRC tool, however, cannot guarantee 100% accuracy and some results may still come back inconclusive. Additionally, experts in IR35 such as Brookson Legal provide services to assist organizations with the transition ahead of the April deadline that combine both automation and a human touch to classification
If you would like to know more about how a VMS can help you manage your contingent workforce, including IR35, get in touch with one of our experts today!
Meet the Expert
Taylor Ramchandani – VP of Strategy
Taylor Ramchandani is responsible for the management and strategic planning of the VectorVMS vendor management system. Taylor is committed to client satisfaction and to ensuring VectorVMS technology meets the current and future needs of clients and managed service providers (MSPs). She uses market research and in-depth industry experience to create products and services that make extended workforce management efficient and intuitive. Taylor oversees product development, marketing, and business partnerships for VectorVMS and is responsible for driving innovation for contingent workforce management. Connect with her on LinkedIn.
