The benefits of hiring contract staff, either on a short- or a long-term basis, will be familiar to many organisations, both large and small, across all kinds of industries and business sectors. Contractors bring flexibility, allowing businesses to scale up for a particular project, without the burden of hiring permanent staff. This might be during a period of transition for the business as it heads in a new direction, or it might be led by changes in the marketplace, such as an IT project that aims to comply with national or international regulatory change. Contract hiring also allows organisations to source highly specialist skills only when they are needed, rather than keeping employees permanently on the payroll when there is no ongoing requirement for their skills or seniority level. Maternity and paternity leave is another example of where a contract hire is the perfect solution, along with sabbaticals and overseas postings that leave a domestic position vacant.
When it comes to hiring contract staff, one of the most important things to be aware of is IR35. Whilst IR35 legislation has been around for a little over 20 years now, it’s vital to know what this legislation involves and to keep abreast of the IR35 changes that have come into effect in April 2021. Failure to keep up to date on these IR35 changes could have serious implications for businesses, in particular those operating in the private sector.
What exactly is IR35?
Named from the press release issued to announce legislation introduced by the Inland Revenue (now HMRC), IR35 is part of the Finance Bill, and it came into force back in 2000. It was designed to oblige contract staff to pay income tax and National Insurance as if they were regular employees. For years prior to the introduction of this legislation, many contractors had enjoyed a fairly privileged financial position whereby they formed a limited company through which to provide their services to clients, with the limited company charging market rates, but the individual behind the company being paid a nominal wage by the limited company and then taking dividends from their company to make up the rest of their income. These limited companies are often known as Personal Services Companies (PSCs). Operating in this way had very significant tax advantages for the individual contractor, who could structure their income such that they paid little or no tax and minimal national insurance contributions. Since the hiring client did not have to operate PAYE or pay employers’ National Insurance contributions, there was a gain for them too.
Obviously, it was only a matter of time before the Inland Revenue decided to do something about this, and the introduction of the IR35 legislation meant that contractors became ‘deemed employees’ and were therefore liable to pay income tax and national insurance contributions at the same rates as permanent employees. In fact, contractors found that under IR35, they had to pay both employee’s and employer’s national insurance contributions on the income earned through the contract, meaning that they were significantly impacted.
In order to determine whether a contract hire is subject to IR35 rules, there are a set of criteria, covering how much control the employer has over the work undertaken by the contractor, whether a specific individual is required for the hire or a substitute could be sent, and whether there is a mutual obligation within the contract, to offer work and to accept it. This can be a complex area, and there are many other contributory issues that can be taken into account when determining IR35 status, so many contractors take professional advice to determine the IR35 status of each contract they enter into.
The 2017 IR35 changes
Whilst the IR35 legislation has rumbled along for many years now, it has not been without its critics, and many feel that it has caused material financial hardship to contractors over the years. In order to strengthen the IR35 rules and mitigate any harm done by the legislation, the government introduced new ‘Off-Payroll’ tax rules in 2017, although from that date, these only applied to contract staff employed in the public sector. Even though the new rules have their own formal and informal names, they are still commonly referred to as IR35.
Those IR35 changes meant that clients in the public sector suddenly had an obligation to ensure compliance, rather than it being solely a matter for the contractor to determine their IR35 status. Responsibility for determining IR35 status for each contract switched from the contractor to the client and additionally, the ‘fee-payer’, which could be the end client or a recruitment agency, became liable for calculating and deducting tax, via the PAYE system. They also became liable for employer’s National Insurance contributions of 13.8% on the fees they paid to contractors.
Does IR35 Apply To Private Sector Contracts?
When the Off-Payroll changes were introduced back in 2017, they were applied solely to public sector contract hires. However, there is some big IR35 private sector news on the horizon. From April 2021, the same Off-Payroll rules will apply within the private sector, as well as the public sector, albeit with some qualifications to protect smaller businesses. Originally intended to be rolled out in 2020, these IR35 changes were delayed until 2021 because of the global Coronavirus pandemic.
What Changes Are Coming To IR35 Legislation?
From April 6, 2021, private sector firms that engage contract staff will be liable for determining the IR35 status of each contract they enter into. That means they will be obliged to operate PAYE and pay employers’ National Insurance contributions for each contractor they hire. There is an exemption for small businesses who hire contract staff, which will be welcomed by many firms. For the purposes of this legislation, a small company is defined as having an annual turnover of less than £10.2 million, balance sheet assets of less than £5.1million and fewer than 50 employees. Clearly, that definition includes a huge number of SMEs, who will no doubt be breathing an enormous sigh of relief. For them, hiring a contractor remains as it was, with the responsibility for determining IR35 status staying with the contractor or the PSC through which the contract is carried out. There is no liability on the part of the SME client. In all respects, the situation remains exactly the same for private sector SMEs, providing they continue to meet the definition of an SME.
For larger organisations, however, the new IR35 private sector changes will require significant changes to the way in which they handle their contract staff. Both new contracts and existing contracts will need to comply with the legislation, and this will need to be negotiated with the PSC or contractor involved, in advance of the start date for the changes. It’s likely that many firms will need to consult with an IR35 status specialist to ensure that they are fully compliant for every contractor they hire. There are real-world specialists of course, as well as online solutions that can assess IR35 status on your behalf. These solutions can even offer insurance against an HMRC challenge, to bring greater peace of mind. Where large teams of well-paid professional contractors are involved, the financial implications of the IR35 changes can be significant, and the penalties for non-compliance could be highly damaging. For both of those reasons, it’s vital to ensure that your organisation fully understands how to assess IR35 status and how to process contractors who are ‘inside IR35’.
Will the changes to IR35 be delayed in 2021?
Whilst there have been mutterings from many quarters about whether now is the right time to introduce the postponed IR35 changes, it does look reasonably certain that the changes will take effect from April 6. Whilst we are still in the grip of the global Coronavirus pandemic, and very definitely feeling the financial and economic effects of a year of lockdown restrictions, it looks like the government’s view is that there is now light at the end of the tunnel, which means things have to start to get back on track, and a ‘business as usual’ approach is now warranted. With just a few days left to go, if you have not taken steps to understand the private sector IR35 changes, now is very definitely the time to do so. If necessary, it’s important to take professional advice in order to ensure complete compliance from day one of the new IR35 rules.
Whilst we cannot offer professional advice on your IR35 obligations as a hiring organisation, we are more than happy to discuss with you the general principles in play, and to point you towards professional advisors where appropriate. What we can do, however, is talk with you about the benefits of hiring contract staff and the flexibility that contractors can bring to your organisation. Whether you are a large corporation or an SME, get in touch with Cartisian today to discuss your hiring requirements, whether they are contract or permanent, or for a single hire or an entire team. With our expertise in technical recruitment and our commitment to delivering the very best talent, your recruitment needs could soon be taken care of, with outstanding results.