IR35 has been a significant topic of discussion within the business community over the past 12 months, following changes to legislation for public sector workers in April of last year. Here we will explore how these changes have impacted the contracting industry over the past year and what the future of IR35 may hold.
What is IR35?
IR35 was introduced into legislation within the Finance Act in April 2000, back when HMRC was known as the Inland Revenue. The name IR35 came from the first press release announcing the changes, published by HMRC (then the Inland Revenue).
IR35 was implemented to tackle tax and NIC avoidance amongst partnerships and limited companies. Prior to the legislation coming into force, the process for an employee to convert to a limited company contractor was extremely easy and meant that considerably less tax was paid, with very little differentiation in responsibilities and procedures between employee and contractor.
What have the changes meant for contractors?
From 6th April 2017, contractors working within the public sector are no longer able to determine their own IR35 status. The responsibility has instead been transferred to those that have hired said contractor (e.g. recruitment company), who are now required to ensure that tax and NI is deducted accurately when applicable.
What is the future for IR35?
The contracting world has not reacted favourably to the changes that IR35 within the public sector has brought. In fact, research carried out revealed that 90% of contractors were ‘stressed, worried or angry’ with regards to IR35 due to, in some cases, a significant reduction in a contractor’s earnings, when falling inside of IR35 legislation.
There have also been discussions for IR35 to be extended into the private sector. However, experts have warned that prior to this happening, reforms are a necessity. Many are predicting that these changes will be announced in 2018’s Autumn Budget. In the meantime, however, contractors working on public body contracts must continually assess their status under IR35 in order to remain compliant, with many contractors reported to have found it necessary to drastically increase their hourly rates to offset the costs that IR35 has meant.
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