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  • Writer's pictureMike Evans

How will IR35 affect the private sector?

Updated: Feb 7, 2020

When IR35 changes are coming and what will change

What is IR35?

IR35 is the legislation that governs whether a contractor is a separate entity to the business they contract for or whether they are just an ‘off-payroll employee’ attempting to avoid tax by operating through a limited company. There is a major change in the legislation coming next April that will mean that many contractors lose 10-40% of their income through extra taxes and will almost certainly push many contractors into full-time PAYE jobs. The new change is that rather than the contractor deciding whether they are inside or outside IR35, the responsibility will move to the business issuing the contract. This presents a huge risk and admin burden to these businesses so they may try to use contractors less frequently or offer their contractors full time jobs.

How will the private sector react to IR35?

It’s difficult to know exactly how the private sector will react to the changes in IR35 but when the changes were rolled out to the public sector in 2017, many organisations understandably said that it wasn’t practical to analyse every contract and working relationship with their contractors to find out if they were inside or outside of IR35 so they deemed all contractors inside IR35. We believe that the private sector, many organisations will be more dynamic and find ways to keep contractors outside of IR35 but the larger organisations like banks will likely react in a similar way to the public sector bodies. HSBC has taken it a step further and given the vast majority of their contractors an ultimatum of either becoming an employee or being terminated. Morgan Stanley has said that all contracts will be inside IR35 and after 22 months of an IR35 contract, the contractor will be terminated or employed.

What does this mean for the contractor?

Once a contract is deemed within IR35, there is very little a contractor can do other than pay the extra taxes. Any income from IR35 contracts will be subject to employers NI, employees NI and income tax but will no longer be subject to corporation tax (net result is usually 10-40% loss of income). The income would still be paid to the ltd company rather than to the individual so to extract the income from the company without being taxed again, the money would usually be put through the payroll. If a contract is deemed inside IR35, the contractor is taxed like an employee (and often taxed more) but they’ll get no pension, sick pay, holiday pay or any other employee benefits.

What can be done to avoid the extra taxes?

Contractors should look at whether they actually are inside IR35. This may not be a factor if the business they contract for opts for a ‘blanket approach’ saying everyone is inside IR35 but if they do look at the contract properly, there are a few things a contractor can do to help their cause:

• Get the contract reviewed by an expert (contact us for more info);

• Never attend company events (Christmas parties, employee trips…);

• Get professional indemnity insurance;

• Avoid using company computers, stationery or cafeterias;

• Arrange an agreement with another contractor so that they could do your work if you were indisposed.

The other important thing to do is to have the IR35 conversation as soon as possible (ideally, prior to a contract being written). Taking a contract from a business that is educated in IR35 law or happy to make changes to working practices to ensure a contract is outside IR35 is going to be very important in these uncertain times.

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