IR35 Contracting in 2020
One of the many questions you will see contractors ask over the period of this year due to the pandemic and pretty much everything in between is “Has IR35 contracting in 2020 changed?” and that is a question which we are going to answer through this incredibility detailed article.
What is IR35
Before we get into what has changed for IR35 contracting this year, we need to begin what exactly IR35 contracting is and how it is easily explained.
IR35 exists to prevent certain workers from avoiding tax by operating as contractors, when in reality they are employees of a company in all but name. So, for example, if a contractor operates via their own limited company, but is treated the same as the client’s employees, they are considered to be within the IR35 scheme and will need to make additional tax payments to HMRC.
Initially the IR35 scheme was introduced by one of our previous Prime Ministers Gordon Brown, as to prevent certain employees from avoiding tax by being treated as contractors in some capacity. This issue at hand, is that the legislation has had quite a bit of notoriety over the years as many businesses who believed that they were hiring contractors in the appropriate manner have been fined by HMRC. Why? Because HMRC has disagreed that they have been hiring contractors in the correct way of IR35 contracting.
Has IR35 Contracting Changed?
Due to the current Covid-19 pandemic all plans and legislation for changing or tweaking IR35 have been put on hold until April 2021. After April 2021, private sector employers will be held responsible for determining whether IR35 applies to any contractor they decide hire – which then requires the private sector employers to treat the contractor as an employee for tax purposes. As this is already the case within the public sector.
This being said, private sector businesses will now have to face a rather tricky choice between two alternatives: Continue to treat the contractors they hire for IR35 contracting as contractors and risk a rather huge fine from HMRC if they disagree. The other option that a private sector employer has is to treat contractors as employees which come with the additional costs of taxes and the holidays required. This does bring some downsides to the contracting world though as many private sector employers and contractors believe that they will receive an unfair tax hit or in extreme cases lose contracts and contractors altogether.
Inside IR35 or Outside IR35?
IR35 was introduced because of the way that employees are being treated differently from contractors. With employees, the employer must provide a pension, paid holidays, sick pay and pay employer’s National Insurance contributions. A contractor, however, is paid a flat fee and can be easily dismissed if there isn’t any more work for them to do.
However, the vast majority of contractors operate in limited companies, either one-person companies or in a lot of cases umbrella companies. It is rare for contractors to be sole traders these days, as unlimited liability makes this risky for contractors, while some companies might be wary of hiring contractors in case HMRC thinks they are employees. Operating as a company also means that the contractor can pay less tax.
Operating as a company doesn’t prevent a contractor from being an employee at all, which is where the IR35 legislation comes in. The IR35 legislation stipulates in a different kind of tone, ‘If it looks like a cow and moos like a cow, it’s a cow.’ In a more professional tone, if the contractor in question is working like an employee, with similar priorities, then they should be treated as one for the purposes of tax.
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