The Government has voted through IR35 reform, which will bring millions of freelancers and contractors into pay-as-you-earn from April 2021.
IR35 puts the onus on employers to decide whether freelance contractors should pay national insurance will take effect from April 21 2021.
Contractors argue that although they will be taxed like regular PAYE employees, they will have none of the benefits of full-time staff, being both still on short-term contracts with no paid holiday.
>See also: Taxman will not fine you for getting things wrong with IR35 within first year
What is IR35 and how does it affect me?
Currently, contractors assess their own tax status, but impending reforms coming into force from April 6 2021 will shift this responsibility to hiring businesses.
The Government has proposed the changes to contracting tax rules in the private sector to combat what it calls “disguised employment”, where contractors do essentially the same work as employees but play less tax and reduced national insurance contributions.
Currently freelance contractors, one-man-band limited companies who work on projects for companies, pay corporation tax at 20 per cent instead of higher PAYE rates, while employers duck national insurance contributions. The Treasury sees both freelancers and employers as gaming the system, as effectively many freelancers are full-time employees.
HMRC estimates that only one in 10 people in the private sector who should be paying tax under the current rules are doing so correctly. The IR35 reforms are projected to bring in £3bn over the next four years.
The IR35 changes will require all companies — apart from those with fewer than 50 employees or less than £10.2m annual turnover — to assess the employment status of any person they hire who works through a limited company.
>See also: One third of freelancers say IR35 changes affecting mental health, contemplating suicide
Commenting on the IR35 reforms being waived through, Qdos CEO Seb Maley said that private sector firms must start work immediately to prepare for the changes. Although thousands of companies will be ready for the changes, he said, many other companies – from banks to oil firms and pharmaceutical giants – should rethink how they plan to manage this “short-sighted” reform.
Maley added: “Despite concerns raised by a number of MPs, who rightly exposed the flaws of this legislation and made it clear they do not believe changes are necessary, it seems there’s no turning back now.”
John Bell, founder and senior partner at insolvency practitioner Clarke Bell said that, combined with Covid-19 and Brexit, the off-payroll reforms mean the UK economy is “set to suffer immeasurably in the years to come”.
Bell said that his insolvency practice has seen a surge in the number of enquiries from contractors seeking to close their limited companies as a direct result of the IR35 changes.
Further reading
6 top tips to prepare for IR35 tax changes – Small Business checklist
