- Career advice, Employers
Empowering Contractors and Clients
In the ever-changing landscape of the contract market, our Operations Manager (and IR35 specialist advisor), Sally Morrison, discusses the latest changes, insights and discourse around IR35 at the moment…
In 2020 I started a new role as Operations Lead at Formula Recruitment, a new world for me, coming from a design/build background. One of the biggest things that I kept hearing was the word ‘’IR35’’… some big changes were happening. I needed to know the legislation and changes inside out so I could comprehensively communicate these with our clients and contractors.
What is IR35?
IR35, or the “off-payroll working rules” is a measure introduced to ensure that individuals working contracting roles are paying taxes fairly. It was brought in due to workers acting as self-employed but gaining employment benefits. The 2021 changes cited that the hiring companies were responsible for the tax status, rather than the self-employed contractor. This change caused many companies to take a more cautious approach. Many updated contracts adhere to IR35, which meant that self-employed contractors “inside IR35” had PAYE and NI deductions on their pay check.
What is the difference between inside and outside IR35?
Inside IR35 means that the contractor is a disguised employee of the company and is receiving company benefits.
- Inside IR35 contractors may also be entitled to certain employment rights and benefits, such as paid holidays and sick leave.
- Contractors working Inside IR35 usually receive a reduced take-home pay in comparison to Outside IR35 contractors, which is due to higher tax and national insurance contributions.
- The contractor’s earnings are taxed at source, like a full/part time employee.
Outside IR35 applies when a contractor is genuinely acting as self-employed, they will typically have more flexibility in how they work, and sometimes work multiple contracts at one time.
- Contractors classified as Outside IR35 are responsible for handling their own tax and NICs. They typically operate through a limited company and pay themselves a combination of salary and dividends.
- Contractors Outside IR35 generally retain a higher portion of their earnings compared to those Inside IR35, as they have lower tax and NIC liabilities.
- Contractors classified as Outside IR35 have fewer employment rights and benefits compared to employees. They are generally not entitled to paid holidays or sick leave.
Why is this relevant now?
In 2021, IR35 saw some big changes…
- IR35 was expanded its reach to include medium and large companies in the private sector (having previously been confined to the public sector).
- The responsibility of determining the employment status moved from the individual contractor to the hiring company.
- Contractors were given the right to appeal to the determined employment status.
- Small companies (defined by the Companies Act 2006) were exempt from the changes, making them very desirable employers for contractors.
- Contractors found to be inside IR35 were subjected to PAYE taxation and NI deductions.
- All responsible parties (the hiring companies and any involved agencies) are subjected to increased compliance regulations and reporting requirements.
The changes caused an uproar in the contract community, with many medium and large companies having to increase their offering to entice contractors who would now be considered inside IR35. Many contractors solely requested roles outside IR35 with agencies, making it harder to find roles in small companies for them. The start-up community benefitted greatly from these changes.
However, in September 2022, then Chancellor of the Exchequer, Kwasi Kwarteng announced plans to repeal the 2021 reforms due to “unnecessary complexity and cost for many businesses”. This plan was quickly scrapped when Jeremy Hunt reclaimed his role as Chancellor in October.
So, where does that leave us now? Despite Jeremy Hunt’s announcement and the 2021 legislation changes remaining for the foreseeable future, it has added fuel to fire of those who don’t support the current law. However, the sector remains resilient with 2.3 million contractors and freelancers in the country (increased from 2.1 million in 2021). Not only that, 65% of contractors now report feeling confident about their employment status, compared to just 35% in 2020.
Kwasi Kwarteng may have put a spotlight on the conversation around the cost and complications that medium and large companies (and the public sector) have been navigating since 2021, but the figures would suggest that the decision to scrap any changes was the right one. Those who felt the pinch of being identified as inside IR35 have also adapted to the new changes, with 72% of contractors diversifying their income.
Empowering Clients and Contractors
In the case of IR35: with knowledge, there’s power.
A frequent mistake that occurs is a company standardising a blanket IR35 policy within their company; every contractor hired, is done so inside IR35. However, when looking more closely, company benefits such as paid holiday, sick leave and employment rights haven’t been included. Contractors must keep up to date with the legislation to ensure they are benefitting correctly, whether operating inside or outside IR35. Companies must have an IR35 specialist in-house or seek agency consultation for compliance and risk mitigation.
Because of this, many contractors have started collaborating together (including online forums and LinkedIn groups) and enhancing their knowledge by researching the subject and seeking expert advice.
Over the past few years, I have delved deeply into IR35 and have gained insights that enable me to advise both clients and contractors on effective ways of working within guidelines.
For both contractors are clients understanding IR35 is crucial for compliance and risk mitigation. I am always here to help with guidance and making accurate determinations based on the actual ways of working. Having the knowledge to do this avoids any potential legal and financial risk. My journey of knowledge is constantly evolving and having built confidence in the subject over the years, I can help both contractors and clients in strategic decisions when it comes to IR35.
Overall, I feel that contractors now have more say in the roles they are taking on and the tools they need/ways they need to be working to ensure they are working outside IR35 and therefore earning more money!
If you have any questions about IR35 or how Formula Recruitment can assist you with compliance and reporting, talk to Sally.
Written by Sally Morrison, Operations Manager