With only 10 weeks to go until the new IR35 legislation comes into effect, questions remain about who will be picking up the bill.
From the 5th of April 2021, the responsibility for determining the IR35 status of a contract will shift from a contractor to the client hiring them and will be applied to all payments made. In short, the client will determine if a contractor can operate as genuine contractor (outside IR35) or must become a temporary employee for tax purposes (inside IR35).
Whilst these changes will have limited impact on those genuinely operating outside of IR35, the impact on those now deemed inside IR35 will be significant. We have already witnessed some clients taking an ultra-cautious approach, effectively throwing a one-size fits all ‘inside IR35’ blanket across all contract resource, changing their status to that of PAYE temporary employees, rather than contractors who typically pay themselves dividends.
Why does this matter you might ask? Well, it significantly increases the cost to the client and reduces the take home pay of the contractor. As an example, a Bid Writer who is currently charging £500 per day outside IR35 would need to charge £568 per day to take home the same net pay inside IR35, based on the difference in tax on PAYE versus dividend income. The hiring client that determined them to be inside IR35 would then need to add Employers National Insurance (13.8%) and the monthly apprenticeship levy (0.4%) to the £568 per day, bringing the total cost to £643 per day. This is nearly 30% more per day for the same services. And whilst our numbers are based on some standard assumptions, whichever way you cut it, the price increase is significant.
And so, to the elephant in the room – who is going to pick up the bill? Will contractors be asked to take the hit, or will clients happily pay more for the same services? Our experience to date is that many contractors are turning their backs on PAYE work. Many clients believe they will simply pass on the additional tax burden to the contractor but that would significantly affect the whole business model and justification for the extra risks contractors take. Worse still, contractors deemed ‘inside’ will not qualify for other benefits such as holiday pay or sick pay. So, they will pay the same tax as an employee, but without the benefits.
With so many clients yet to fully understand the implications of the changes, and many contractors still hoping their current services fall outside the reach of the new legislation, there will be many twists and turns ahead.
Contractors should be working with their accountants to calculate their equivalent PAYE rate, which will be heavily influenced by how many weeks they work, the expenses they claim, pension contributions and any additional income. Whilst all advertised contract opportunities will need to give an indication of ‘inside’ or ‘outside’ after 5th April, contractors might find that the determination statement comes after they have started delivering services. Hence, it is imperative that they have quoted two rates to the client before starting – an ‘outside’ rate and an ‘inside’ rate. Walking away from PAYE work on principle alone could prove very costly in the medium term.
Clients need to implement a process for delivering status determinations. Many are simply relying on HMRC’s widely criticised Check Employment Status for Tax (CEST) tool to assess their IR35 position, but it has proven time and again to be over simplistic in its assessment of contracts.
Whatever your thoughts about the new legislation or the viability of becoming, or indeed remaining a contractor or consultant, action needs to be taken. Bid Solutions is prepared for the changes and can offer you advice to help smooth the transition – our IR35 Compliance page is a good starting point. Please do get in touch if you have any specific IR35 related queries. For more general advice about becoming a contractor in the Bid and Proposal profession, take a look at Bidding Quarterly 7 – Freelancing. Finally the Facts.