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IR35 changes are coming – What business leaders need to know now

Businesses in the private sector that work with contractors have until April 2020 to become fully familiar and compliant with the updated off payroll rules in the private sector (IR35). Although the one-year extension from the original April 2019 deadline which was floated allows managers to have some breathing space, there certainly is no time to delay preparation for what will be a significant and arduous period of change. It is expected that this will affect a third of the contingent workforce, and that new systems will take time to implement, so it is advised that all companies begin planning in good time – and the clock is ticking.

While the consultation on how the changes will be implemented is still open, fundamentally they will be an extension of the rules that were rolled out to the public sector in 2017 which were designed to tackle the loss of tax and NI revenue from ‘disguised employment’ - people whose working practices are more akin to those of traditional employees.

What are the IR35 changes?

If the updated IR35 rules are extended in their current form, they will place a greater responsibility on employers. It will no longer be the contractor’s obligation to determine their IR35 status, but the company which engages them. Private sector employers will have to take on the role of ‘tax assessor’ and decide whether to deduct tax and national insurance (NI) from them via payroll, depending on if they are ‘inside IR35’ or not.

How does this impact businesses?


The penalty for intentional or unintentional non-compliance with the new IR35 regulations could result in a substantial fine. Employers who hide ‘disguised employees’ can be ordered to repay anywhere between 30%-100% of unpaid tax depending on the circumstances. For organisations with hundreds of contractors, ignoring the legislation is simply not worth the risk.

Access to talent

When the IR35 reform was introduced to the public sector, many public bodies experienced a mass exodus of talent and it is feared that there will be the same outcome for the private sector. During a time of extreme skills shortages across a wide spectrum of industries, this could be a detrimental hit to the strength of the UK’s labour market and wider economy at a critical time. Another aspect that limited access to talent during the public rollout in 2017 was employers’ lack of preparation. Due to the limited timeframe, many organisations were classifying contractors as ‘inside IR35’ to be safe and avoid penalties, creating distrust and further talent shortages.

Rates for contractors go up

Along with contractors relocating outside of the country to mitigate a drop-in net pay during the 2017 rollout, many decided to increase their rates to counteract the tax hike too. Research from APSCo found that 45% of professional recruiters had seen contractor rates rise since the new rules were introduced, with 46% of these witnessing increases of more than 15%. This is also expected to occur in the private sector once the updated 2020 IR35 changes are implemented.

How to manage these changes

With this in mind, businesses should look at developing their in-house team to manage staffing budgets and workforce plans. This will enable smooth relationships with contractors and possibly increase permanent headcount within the firm. With the penalty for non-compliance too high to risk, companies must ensure that they have a dedicated team that is able to deal with the management of contingent staff and that can also conduct appropriate status determinations. This may take some planning and upskilling; however, it is a much more reliable method than working with third-party companies or the government’s existing Check Employment Status for Tax (CEST) tool- which has received heavy criticism in the past.

To find out more information or to get advice with developing an in-house team to combat the new IR35 regulations, get in touch today