Back in October 2018, the Chancellor announced that the changes to IR35 would be extended to the private sector. Subsequently it was announced that these changes would be delayed until April 2020 and would only apply to large and medium sized organisations.
So, what is IR35?
IR35 is designed to tackle tax avoidance. This is where self-employed contractors set up limited companies to pay themselves through dividends, which are not subject to National Insurance, rather than be ‘employed’ and pay tax and national insurance through PAYE.
In April 2017, the Government introduced IR35 to the public sector to discourage organisations from using off-payroll working practices, such as self-employed consultants, which negatively impacted on the amount of PAYE tax collected. As a result of this, the public sector organisations needed to determine the tax liabilities of any self-employed workers and whether or not they should be treated as PAYE employees.
Subsequently, the announcement that this is to be applied to the private sector has raised more questions for employers. These include; what will differentiate a small or medium organisation? and is it fair that IR35 will not apply to small organisations?
Research has found that public sector hiring managers had lost skilled contractors as a direct result of the changes to IR35 regulations and that many projects had been delayed or cancelled due to the associated increase in related employment costs. All this at a time where employment levels are historically high, and the jobs market remains highly competitive. Therefore, there is concern that when the IR35 tax reforms are extended to the private sector, this will lead to a significant hike in costs and a shortage of skills which could damage economic output.