UK businesses not prepared for IR35 private sector changes

03 December 2019 4 min. read

In April 2020 the new IR35 legislation will come into effect for private sector contractors in the UK, ensuring that contractors pay the same tax and National Insurance contributions as equivalent employees.

It was back in 2000 when the Intermediaries Legislation – the tax law that became known as IR35 – entered the statute books. It was introduced to counteract the avoidance of employed levels of tax and national insurance by individuals providing their services through intermediaries (Personal Services Companies [PSCs] – limited companies). 

In short, it was intended to stop contractors reaping the same benefits as a permanent employee but also enjoying the tax and National Insurance saving opportunities that came with being a limited company.

Over the past two decades, various amendments have been made to IR35 by successive governments, having found that too many contractors with a limited company were illegitimately working outside the rules. While enjoying taxation perks, in practice they operated as ‘disguised employees’ – people whose working practices are more akin to those of traditional employees.

UK businesses not prepared for IR35 private sector changes

In April 2017 a large change to IR35 came into effect when, in the public sector, the burden of determining employment status shifted from contractor to organisation and became mandatory. Instead of the contractor assessing whether or not he/she is inside IR35, this obligation has been handed to the contracting party – the client.

When a contractor is deemed inside IR35, then the client must deduct employees’ National Insurance contributions and income tax from the contractor’s pay, as well as paying employers’ National Insurance contributions. 

Private sector following suit

Next year, this change is also coming into effect in the UK’s private sector, with medium and large companies (small businesses are excluded) becoming responsible for determining the tax status of contractors. This change will have major operational implications for UK businesses and contractors, including in the way they collaborate and commission/deliver work. 

For contracting parties, it can also have large financial implications. By 2023, HMRC expects IR35 for the private sector to add £1.3 billion in additional income to its coffers per year. 

Despite its impact, however, a staggering 71% of medium and large businesses are still unaware that the IR35 changes come into effect on April 6, 2020, according to a survey by Sullivan & Stanley of 500 UK business decision-makers across multiple sectors. 

“The Government’s decision to extend IR35 to the private sector from April 2020 has caused unease for contractors and the organisations that employ them.”

One of the reasons behind this is that more than half (54%) of respondents feel that they haven’t received enough information on IR35, while 52% claim that HMRC’s message is too fuzzy, contradictory or confusing. 

As such, less than four in ten firms (38%) believe that they will have a robust strategy in place by the time IR35 changes kick in, with over 50% stating that they will need up to six months after the change date to be fully ready for the new legislation. 

“Almost three-quarters of businesses run the risk of not being ready on time – and that’s a concern,” says Kevin Corne from Sullivan & Stanley, a consulting firm and provider of independent consultants.

He added a piece of advice for companies preparing for IR35: “A lot of businesses are looking at IR35 with a transactional lens and not taking into consideration its transformational capability. We believe that IR35, if prepared correctly, presents an opportunity to revolutionise operating models that future-proof firms, give freelance experts the recognition they deserve and change business for the better.”