The ‘genuinely self-employed’ need not fear IR35 changes
Those genuinely being contracted on a self-employed basis are not being targeted, just those disguising themselves as self-employed to create a more favourable tax environment
The potential pitfalls that IR35 could bring have been exaggerated, according to Gorilla Accounting, a specialist firm for contractors and freelancers.
Although not as draconian as expected, the changes proposed in the draft legislation emphasise the importance of personal service company contractors understanding their status to ensure they are correctly classified by their clients.
Daniel Fallows, director at Gorilla Accounting, sought to ease fears that freelancers or contractors might have.
“The rules on who is classified as employed according to IR35 remain the same, but the responsibility and risk for making that assessment has changed. Those who are genuinely self-employed and are currently compliant have nothing to worry about, but they will need to review their status more regularly,” he said.
From April 2020, private sector clients will be responsible for assessing whether contractors are self-employed by applying the IR35 criteria. This shifts the responsibility and risk, which has hitherto been that of the contractor, onto the end client. The change in legislation excludes engagements with small companies, where contractors will continue to determine their own IR35 status.
The new legislation is designed to increase compliance and does not change the IR35 assessment criteria. It is aimed at individuals supplying their services through an intermediary to medium or large-sized organisations. The intention from HMRC is that those who are complying with the existing rules should not be affected, and the measure is targeted at individuals who do not comply with the current rules.
Clarity needed on CEST
An updated online Check Employment Status Tool (CEST) will be made available before the end of the year, although it is still unclear what changes will be made to the tool. Fallows said those in doubt should seek out the experts.
“There has been concern about the viability and effectiveness of the enhanced HMRC CEST tool, and therefore it is important that contractors and freelancers seek specialist advice to ensure they are correctly classified according to the IR35 criteria. Although HMRC will release further guidance on this new legislation, we advise that self-employed contractors or freelancers take specialist advice as soon as possible,” Fallows said.
Under the new rules, the responsibility and risk that is associated with mistakes in classification are passed onto the employer. The changes mirror the rules applied in the public sector, where disputes have arisen when employers have sought to avoid the risk of fines by blanket classifying all contractors as employees.
For a £10,000 project, it is estimated that a mistaken classification can cost contractors over £5,000. Over the next few months HMRC will release further guidance on the new legislation. However, Gorilla Accounting believe that a proactive approach is crucial, alongside having contracts properly reviewed by specialists is the most reliable way to avoid any issues.
The criteria surrounding who is considered an employee for IR35 purposes is not changing; the only change is the party who determines this. Therefore, Gorilla Accounting believe the demand for contractors and freelancers will not be affected, and the flexible workforce should remain an important part of the so-called gig economy.