The extension of IR35 legislation from the public to the private sector from April 2020 will result in significant changes to contractors, with many of them having to move into Pay As You Earn (PAYE) status.
The changes are being brought in by HM Revenue & Customs (HMRC) because the Government believe that fewer than 10 per cent of freelancers operating under a personal service company (PSC) actually comply with their tax responsibilities, meaning the Treasury is missing out on millions of pounds of income.
The legislation will mean that the burden of determining employment status will shift from the contractor to the contracting party, or client, and means that in this intervening period, both contractors and clients should review the legislation and prepare for the changes.
If it is decided that a contractor is working inside IR35, meaning that they are to all intents and purposes an employee, then the client or company acting as the ‘fee payer’ must deduct employees’ National Insurance contributions (NICs) and income tax from the contractor’s pay, as well as paying employers’ NICs.
However, many firms are completely unprepared for this change, with a recent survey suggesting that more than 70 per cent of medium and large businesses are unaware of the impending legislation.
On top of that, around half of those polled believe that HMRC has to do more to inform businesses, and more than half believe they have not received sufficient information.
Clients should also be aware that if they fail to assess contractors correctly now, going forward, they could be faced with a major tax bill for unpaid PAYE, tax and NICs.