Since its inception, IR35 has been a hot button topic for contractors and employers alike. As Callum Morrison of Crunch explains, this legislation was designed to stop workers from claiming contractor status to gain tax benefits. Although HMRC hoped that IR35 would create clearer definitions of genuine contractors and “disguised” employees for tax purposes, Morrison says that contractors often struggle to determine their status. Now, multiple outlets are reporting that the United Kingdom will move forward with new plans to reform IR35 in April 2020.
Based on what we’re already seeing in the market, the April 2020 reform could have an unprecedented impact on the United Kingdom, especially within the financial services industry. In this post, we’ll take a closer look at how the April 2020 reform has already shaken up some of the largest banking institutions, as well as a few things that could derail it from going into effect.
Applying Public Sector Rules to the Private Sector
In 2017, HMRC began requiring public sector employers to determine the IR35 status of all contractors, which many people felt unfairly targeted government employees. Some experts predicted that this rule would eventually be applied to the private sector. The April 2020 reform would make those predictions a reality. Now, some of the UK’s most recognised companies are suddenly facing the daunting task of determining the IR35 for its large pools of contract workers.
Still, there are a few nuances to the proposed IR35 reform. Taylor Wessing writes companies that meet two of the following three criteria will ultimately be exempt from the April 2020 changes:
- Annual turnover is not more than £10.2 million
- The balance sheet total is not more than £5.1 million
- The business has no more than 50 employees
While this is good news for a small percentage of companies, many other businesses find themselves in a tenuous position. A study by IT Contractors UK found that out of 2 million self-employed workers in the United Kingdom, 1.77 million are contracting on a full-time basis. Not only will the proposed changes to IR35 impact a large number of companies, but it will have an even greater effect on their contractors.
The Potential Impact of April 2020’s IR35 Changes
In response, some of the UK’s largest banking institutions have taken proactive measures to prepare for IR35 reform. ContractorUK recently reported that HSBC will stop hiring contractors beginning in September. Additionally, HSBC’s current pool of contractors will be forced to quit or join the organisation in a full-time capacity. Morgan Stanley and Lloyds are making similar plans to eliminate contractors from their workforces altogether.
However, some amount of doubt still lingers as to whether the legislation will be passed before April 2020. Caroline Donnelly of ComputerWorld UK reports that HMRC has been inundated with requests to put its IR35 plans on hold for at least 12 months. One request from KPMG stands out in particular, as it urged HMRC to “undertake a review of the new regime in mid-2022 to allow for improvements.” KPMG’s summary adds that the taxation of self-employed workers should be considered more holistically. “Our view is that it would be preferable if broader ‘Good Work’ reforms proceeded before, or at least in tandem with, IR35 reform,” the report continues.
Even with this amount of uncertainty around April 2020’s reform, all organisations must ensure compliance with IR35. Want to learn how Vox can help? Click here to get in touch.