With IR35 changes looming, you may want to weigh up the pros and cons of using a consultancy rather than a contractor. IR35 is a tax legislation that has been in effect since 2000 and is due to undergo a reformation in April of 2021. Furthermore these changes have already been implemented in the public sector and are due to be brought to the private sector. The changes brought from this reformation are likely to have serious implications for many businesses and contractors throughout the U.K.
Here’s everything you need to know:
What is IR35?
IR35 was developed in efforts to reduce fraudulence from workers with claims to be contractors in order escape full taxation. In other words this legislation was put in action after there was a rise in what is referred to as ‘disguised’ employees. A ‘disguised’ employee is essentially a contractor who works in a permanent role. However, they are being labelled as working through an independent company. Meaning the company evades the tax responsibility that a regular employee would bring.
This employment approach appears favourable to companies because it means they are omitted from National Insurance Contributions (NIC). In addition, they can hire and fire employees with more ease at times convenient to them. This is done mainly in situations when the company does not know how long a project may go on for. This is favoured by ‘disguised’ employees because it allows them to pay less tax and may also give them more flexibility. More information is available here.
How is it changing?
While effective, IR35 has some noticeable gaps that is allowing these ‘disguised’ employees to go undetected or makes them harder to identify.
- The reformation of IR35 aims to close these gaps and makes it very clear as to how a person can be classified as a contractor.
- The companies and agencies providing or receiving work from contractors will now be responsible for accurate, fair and individual assessment.
- This ensures all employees are operating within the correct tax legislation.
What does IR35 mean for me, as a company?
The new IR35 reformations will require you to give full and fair assessment to all employees to determine whether they can be classified within the IR35 bracket. This brings serious implications on the behalf of the contractor. Therefore, trying to skimp on this by using blanket assessments will result in the loss of trust and workers.
The rules will apply to medium and large-sized private sector companies that meet two or more of the conditions below:
- You have more than 50 employees
- You have an annual turnover exceeding £10.2 million
- You have a balance sheet totalling more than £5.1 million
What does IR35 mean for me, as an independent contractor?
The responsibility now falls on the agencies and companies to classify your status. This means you need to be extra careful and selective of those who you work with. It is important that you receive a full assessment; if you feel there is any whole scale or blanket process occurring, it’s probably not IR35 compliant. At the end of the day, IR35 reformations save you, an independent contractor, from being falsely classified and therefore, under or over taxed.
What are my options for IR35?
IR35 reformations are due to hit the private sector in April of 2021. This means your company has until then to make sure all existing workers are correctly classified within IR35. Additionally, all processes going forward allow for accurate classification of future workers. There are three main options that companies may take to ensure their workers are operating within IR35:
Internal Contractor Assessment
Under the reformed IR35, the responsibility of correct worker classification is placed on the company. This means for each and every contractor or employee that passes through your organisation, you must hold a complete assessment to ensure they are placed within the right tax bracket. Whether you are a small or large organisation, this is a lengthy process that cannot be escaped through shortcuts.
Make Contractors Full-Time Employees
Rather than enlisting independent contractors to carry out work on projects, you can choose to hire them as full-time employees. This means you would need to get them fully set up as an employee of the company with a contract and the same benefits enjoyed by other employees.
Use Third Party Agencies
At the end of the day, this all becomes quite a hassle for companies to continually go through the assessment process of determining a contractor’s status. Instead, a way around this is to use third party agencies that provide trusted contractors to complete these projects. This way you can trust the workers, being provided, are operating under the correct tax legislation, taking away any doubt and saving you time. Using these pre-vetted contractors, you can trust that they are highly experienced and will be able to provide excellent work without the hassle of assessing their tax status.
Alternatives to consider before the IR35 Reforms kick in
Consultant vs. Consultancy
You may want to consider using independent consultancies rather than contractors, especially after the IR35 reforms are implemented. A consultancy is a firm that can be hired by a company or organisation to provide expert opinions on a given subject. Whereas, a consultant is one person that may be hired by a company to complete work over a certain period of time.
The IR35 reformations are tackling the issue of companies classifying full-time employees as ‘contractors’ to avoid full taxation and employee benefits. Consultancies large enough to serve the needs of multiple clients, concurrently, are a route to achieving the dynamic access to experts, when projects require, whilst ensuring you remain compliant.
Consultancies provide you with much-needed agility without the stress of hiring contractors or full-time employees. Outsourcing your work to a consultancy also brings you an extended skillset. This is because you are not just relying on one contractor or employee to complete the work, rather, a team of experts. The demand for consultancies is expected to rise with the upcoming implementation of IR35 reforms. Therefore, the higher quality and better-trained contractors are likely to follow those demands and join these sought after consultancies.
One of the main issues found when working with consultants is that they can only work part-time for you. This because they will have other clients that they must attend to and mainly to stay in line with IR35. This lack of full-time commitment means you aren’t able to outsource as much work as you’d probably want to, in fear of being fined for IR35 non-compliance. Additionally, the progress of your work is limited to the capabilities and bandwidth of your consultant. Whereas, when working with a consultancy, you can have as much or as little work done as you’d like. Outsourcing through a consultancy will ensure your work is getting attended to by highly trained and qualified engineers.
No Need For Full-Time
There is also the option of hiring a new full-time member of staff to fulfil your increased workload. However, that could be a lot more hassle than it’s worth. Recruiting them, training them and then ensuring they are up to speed takes time – time you probably haven’t got. Additionally, you must provide them with the same full benefits as your other employees. Instead, when using a consultancy, you receive top-quality work without the hassle of hiring staff.
Do you have questions about IR35?
Overall, IR35 reformations are happening and the sooner you prepare for the changes, the better off you’ll be. If you have any questions about technology consultancies, give us a call.
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