IR35 Reform: Soon to be implemented, time for freelancers & contractors to choose the right path

Welcome to iCalculators monthly Self assessment guide and news for October. In this month's news we take a look at:

  1. Implementation of IR35 reform - When and How
  2. Who will be impacted from IR35 reform
  3. Take of the U.K. based banks
  4. Impacts of IR35 reform on technology sector
  5. Lack of awareness about IR35 reform

Key points in Self assessment guide and news for October

  1. Basic understanding of the IR35 rule
  2. Approach of major firms on IR35 rule
  3. Impacts of IR35 reform on public sector
  4. Potential impact of IR35 reform in medium to large private sector
  5. Surveys and polls are showing urgent needs of awareness before in legislation of the rule
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What is IR35 and IR35 reform

Intermediaries Legislation, also known as IR35 is designed for those who work for a client through an intermediary such as limited company and partnership in the UK. First introduced in the year 2000, IR35 was meant for freelancers and private contractors who are believed to be 'Disguised employees' by HMRC. These are the people who work for a firm in a similar way of a full time employee but bill for their services via their limited companies.

This process is tax efficient and most of these relationships' transactions are genuine. However, there are exceptions and some organizations take advantage by paying their employees in a way to save on national insurance contributions and other employment benefits. This also means that the freelancers are saving on income tax though this is tax evasion.

Implementation of IR35 Reform

In the beginning, IR35 employment status was declared by the contractor and not the hiring organization. This changed with IR35 reform in year 2017 for public sector. The onus of proving self employed status shifted to the hirer from the contractors themselves.

This rule was reformed to implement to private sector as well. It will be effective in April 2020. This means medium to large private sector hiring firms will be responsible for the status of contractors and freelancers.

Impact on IT sector

Impacts of IR35 reform are clearly visible in the IT sector too. The number of freelancer techies have significantly dropped during the last year. The UK Office of National Statistics data shows that there was 2.4 per cent fall in IT contractors in 2018 with comparison to the previous year.

IR35 reform is set for Medium to large private sector in April 2020. IT contractors that work with financial sector are getting a clearer picture as the biggest players in the market are planning ahead of the reform. This will release them of the obligation to assess tax status of each contractor they work with on a case to case basis.

In an earlier news this month, Barclays has informed its contractors that "as a consequence of IR35", it will not engage with the contractors who provide their services via personal service company, limited company or intermediary. Barclays will engage on a PAYE basis only for new and renewed contracts. This means that by the start of 2020 all new contractors who work for Barclays will be taxed on pay as you earn (PAYE) basis.

Some other big institutions like LLoyds banking group, HSBC, and pharma firm GSK are outlining similar policies with reference to their dealing with contractors and freelancers.

Delays in IT projects in the public sector

A recent survey shows that almost 80% of freelancers have said that the projects they have been working on are delayed due to contractors leaving.

Also, as with this reform when the hirers are liable for assessing the status of the contractors, it becomes a riskier business to hire contractors. Most of the hirers are not ready to take these risks, instead they are relying on more cautious approaches.

Lack of awareness about IR35 Reform

A recently conducted poll about IR35 shows that more than a quarter of contractors and freelancers are unaware that they will become the responsible party under this rule. Almost 31% of contractors are looking for permanent employment. Only 25% of them are content to remain contractors with rest of the contractors being unsure of what they will do.

On the hiring side, 44% of employers believe that these changes will force contractors to look for permanent employers, while just 11% are expecting an increase in contractor costs. Be-IT the generator of this poll also said that 89% of total respondents think that contractors will pay more taxes after the implementation of IR35 reform.

Lack of awareness could cause significant consequences. With the short time frame to implementation of this tax law, it is important that urgent actions are taken to spread awareness.

Find more information on tax and self assessment in the U.K. here.