Contractors: Your questions answered
New IR35 changes will be implemented in April 2021 for private sector contractors - this will transfer responsibility to assess IR35 from contractors, to large and medium companies (the client).
Richard Harris, Chief Legal Officer at Robert Walters, addresses some of the most pressing questions that may impact the interim and contract markets.
IR35 legislation was designed to assess whether a contractor is a genuine contractor rather than a ‘disguised’ employee, for the purposes of paying tax.
In simple terms, this occurs where an individual, who for all intents and purposes, would be an employee of an end user “client” but who operates through an intermediary vehicle such as a personal services company (PSC) to avoid income taxes and to manipulate national insurance contributions. IR35 comes into effect on the 6th April 2021.
Contractors & interims should be mindful that on the whole many large companies will have started preparation for IR35 in advance of last year – when the changes were expected to come into play in April 2020 – and so the last-minute Covid-related pushback by Government would not have changed how far down the line several large firms would have been in their preparedness. As a result, whilst during the past year it has been possible to work through a limited company, many large companies have simply chosen not to take this approach in spite of potentially missing out on better candidates for Covid-related projects.
The next thing to bear in mind is unless there is a real sea change from government - which based on the direction of travel that they’ve taken around the self-employed seems unlikely – IR35 is definitely coming into place this year on 6th April, and for limited company contractors or interims it is important to note that it is not a foregone conclusion that you are inside of IR35. As a result it is important to be looking for projects that can be properly scoped, and ensure you can effectively demonstrate that you are free to work in an independent manner – of which helpfully remote working enables much more easily.
This is a really interesting point and there are a number of ‘boxes’ to go down, all with different eventualities.
For example, if we take the extreme end of a limited company contractor – who pays themselves the minimum salary and dividends on top of that – a client who is keen to keep the contractor on may decide to gross-up their pay and therefore pay the NI owed. In reality this will make the cost of the contractor quite expensive to the company, if you consider the additional tax that needs to be paid.
Even in a scenario where the contractor & client may want to meet in the middle ad keep the day rate the same, the cost still increases as the client is now having to pay the contracts NI which before April they did not need too.
What we are potentially likely to see in the short-mid term is for clients to drive down day rates in order to take into account the employers NI they would now be paying.
Unfortunately this could be a real double whammy for contractors and interim professionals where your day rates have reduced, in addition to no dividends, and a higher overall income tax.
The tax rules actually haven’t changed at all in terms of the underlying whether you are inside or outside of IR35.
What’s changed is where the enforcement would sit, so that contractor would still be liable for anything that happened which is incorrect prior to the switch over date. After the switch over date, essentially the client could potentially be liable but if they do their job properly and they take reasonable steps to make an assessment it’d actually fall on the agency or ‘fee payer’ as first port of call.
In some ways the interim manager or the contractor is actually in a slightly better position personally on the basis that HMRC will be coming after the agency and not them. In turn, it’ll be the agency then passing that liability down that chain.
Another thing to bear in mind from an employment law stance – not HMRC perspective - in the switch over from limited company contractor to a fixed-term employee. If a company does this then they run the risk that all the time they were working for you before may actually be accounted for as continuousness service. In addition, if they have been on the project for more than two years they will have protection from unfair dismissal just like any other employee.
The world as we knew it around contractors is coming to an end – in regards to questioning of limited company contractors, I believe this will be driven more by the clients than by actually what the law says.
In the short term there is going to be a little bit of a nuclear winter around contractors and interim managers - just in terms of working through that model but naturally this will relax as companies begin to see that you can actually be a legitimate limited company contractor.
As a result, that market will naturally open up again but similar to the public sector we’ll see the shutters come down and then an easing up.
What’s positive is that demand for senior contractors and interim managers will no doubt be high during the Covid recovery and Brexit period, and as the overall market begins to reopen and charge forward there will in turn be a candidate shortage which by nature will push up day rates.
