With one third of freelancers and contractors saying that HMRC’s IR35 tax changes are affecting their mental health, there’s a lot of pressure on the industry.
How are the IR35 changes affecting the industry?
At the moment it’s up to the contractor to assess their own tax status, but the IR35 changes take this responsibility out of their hands and give it to the businesses hiring them.
IR35 is HMRC’s crackdown on what it calls “disguised employment”, where companies hire people as “contractors” in a permanent position (as if an employee) while avoiding paying employee benefits because they’re technically self-employed.
In these circumstances both the business hiring and the contractor themselves can benefit from lower National Insurance contributions and more favourable tax rates. It does mean that the contractor, despite acting as an employee, misses out on employee benefits such as holiday pay, sick pay or maternity pay. In that respect, IR35 is encouraging businesses to take on staff, with all of the protection that comes with that.
Businesses nervous about using contractors
The high penalties of getting IR35 wrong mean that some businesses are becoming hesitant to hire freelancers and contractors. Those already on the books are in a state of limbo with a quarter of contractors already having contracts“cancelled” by their clients.
For those who remain, it’s expected that 90% of them will receive a pay cut to cover the cost of putting them through PAYE where income tax and NI will be taken at the source.
The effect on the economy
HMRC believe that only one in 10 contractors in the private sector are paying tax in the correct way. According to research, IR35 reforms are expected to bring in around £3 billion over the next four years in recovered tax.
The downside is that with all this uncertainty, many contractors say they are about to walk away from clients over the next couple of months. Projects suddenly on hold is going to cause quite a dent in the economy.
Dave Chaplin, CEO and founder of Contractor Calculator has called on the government to abandon extending current IR35 legislation to the private sector.
“The fact that over half of freelancers are going to abandon their existing clients speaks volumes. There is going to be an unofficial strike by a quarter of a million workers, and the impact on productivity for all firms that currently rely on them will be immense and the UK economy will suffer,” Dave Chaplin said.