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Who's afraid of IR35?

Last year, HMRC announced that key changes will be coming in April 2020 to IR35, the government legislation covering off-payroll working rules. These changes will alter how contractors (alternatively known as service providers) are defined, in an effort to reduce what is known as "disguised employment".

Disguised employment occurs when someone is employed by an organisation as a contractor, but acts like a regular employee. The line between the two can be a little blurry, so HMRC has defined five specific tests that a contractor must pass in order to be considered… well. Still a contractor.

The 5 tests to determine disguised employment.

  1. Mutuality of obligation – Does the employer feel obliged to keep offering this contractor work after the project is completed? And does the contractor feel obliged to keep taking work from this specific employer?
  2. Control – Does the contractor have set work hours? Does the employer decide how and where the contractor works?
  3. Distinction – Can the contractor be easily distinguished from other employees? Do they get staff perks and benefits? Are they invited to staff parties and meetings?
  4. Unfettered substitution – Can the contractor hire other people to help them with a project? Are they expected to submit the people they enlist to the employer for 'approval'?
  5. Financial risk – Is the contractor guaranteed payment no matter how the project turns out, or is payment conditional upon the job being done?

When someone fits the criteria of disguised employment they can continue being employed as a contractor, but they will now be considered "Inside IR35".

Difference between Inside & Outside IR35.

So, we've established that a contractor who is seen to be in a state of disguised employment will fall Inside IR35. But what does this mean, in terms of obligation?

Under the status-quo, contractors are expected to classify themselves as contractors (unsurprisingly), and to pay their taxes accordingly. Under the new IR35 changes, the onus will fall on employers to classify whether someone is a contractor and pay/tax them accordingly.

Table showing responsibilities for IR35

Contacting all contractors: are you set for IR35?

To get a better view of how the changes to IR35 look to be affecting people, we spoke to 280 technical contractors to find out where they stood in the lead up to the amendments going live.

Out of all the people we spoke to, only around 21% said they weren't worried about the coming changes.

14% are worried and think they will need to pay more tax, and half of this number said they will be raising their service prices to account for that probable tax rise.

Another 14% claimed to be nervous about the changes but said they will be waiting to see how things go before making any big decisions.

8% said that they will keep contracting, but will only take contracts outside of IR35.

And, finally, a whopping 43% of respondents said that they will be looking for permanent roles because of these changes – meaning they will no longer seek out or accept work as a contractor.

Donut chart showing attitudes towards IR35

Does this mean the end of contractors?

It doesn't have to. If done correctly, employers can still engage contractors without worrying about IR35 – they just need to review their working practices to remove any form of disguised employment.

Crucially, that means ensuring contractors are treated as external parties, with no grey areas or wiggle room for confusion. Understandably, employers and contractors alike are concerned about exactly how they can go about guaranteeing an "Outside IR35" status – and HMRC's own advice isn't always that clear cut!

That's why we've put together a brand-new eBook with all our own hints and tips. To find out more about IR35 and its effects on employers, download IR35: Deciphering what it means for you.

IR35: Deciphering what it means for you eBook

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