Are you ready for April’s IR35 tax change?

As a PR freelancer or contractor working in the private sector, you probably appreciate your self-employed status. I know I do. 

If you hire people like us, you probably enjoy the resource flexibility, independent thinking and expertise we bring. But change is coming from 6 April. That’s when an arcane, complex and highly unpopular tax rule called IR35 extends into the private sector. As I’ll explain later, IR35 doesn’t affect everyone, but it could have significant implications for those that it does.

IR35 has been in force since 2000. But in 2017, the rules altered. Responsibility for determining the tax status of contractors switched from workers to those doing the hiring. This changed the public sector freelance and contracting market massively.

Clients stopped hiring contractors. Some contractors faced accepting on-payroll tax status or losing work. Some, fearing higher tax bills, stopped working entirely in the public sector. Others simply closed up shop and went into full-time employment. We could now see the same happen in the private sector.

What is IR35 and why was it introduced?

Everyone pays their own income tax and National Insurance (NI). Traditionally, the self-employed paid less by operating through limited, ‘personal services’ companies, often appointing their spouse or another close family member as company secretary. Both then took nominal salaries below the NI payment threshold, with the bulk of their income as dividends. Dividends were taxed at a lower rate.

This arrangement was legitimate and tax efficient. Think of it as a trade-off for having lower job security, no legal protection, sick or holiday pay; and none of the other benefits that employees enjoy. Equally, clients had no Employer’s NI liability when they hired self-employed contractors or freelancers.

Some operated like this even though working full-time for one organisation with no control over how or when work was carried out. They were, effectively, ‘disguised employees’.

This was lucrative for both parties until some nosey journalists got wind and exposed the abuse. The low point was in 2012 when the Student Loans Company’s chief executive reportedly dodged £40,000 of tax a year. The government was effectively his client and the ensuing scandal meant HMRC began a sweeping IR35 clamp down.

Who does it affect?

If you’re hiring from, or contracting to, a small company you’re off the hook – at least for now. Only firms with 50-plus employees or turnover exceeding £10.2m are bound by the IR35 extension. Note, though, that this also includes client companies based outside the UK. If you work for PR agencies, all but the largest will be outside IR35.

Anyone who thinks they may be caught by the impending changes should act now. A few contract tweaks may be all that’s required. You can do a personalised test and get information from HMRC here. Employers who fit the description above need to audit their contractors now and prepare according to the results.

For specialist IR35 advice, Brookson Legal is the go-to source. It provides a comprehensive website covering the subject for both employers and freelancers/contractors.

And if, like me, you feel motivated to try and stop IR35, you can join Contract Calculator’s campaign.

The Treasury has already agreed to a review because of pressure from business groups. This may see the implementation date extended but many doubt IR35 will be canned entirely.

There’s a fair chance it will, but only if enough people protest.

Written by freelance PR consultant Andy M Turner