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There is nervousness surrounding the introduction of IR35

If you haven’t heard of IR35, it is the name of two tax legislations created by the UK government in order to stop tax avoidance within the workforce. In this blogpost we will delve a little deeper into what it is and what it might mean for the wider business community in the near future.

If workers are working for a company on a project-by-project basis through an intermediary (limited company etc) but are doing the work of someone who would be employed by the company, then they would be entitled a ‘deemed’ or ‘disguised’ employee by HMRC. If found to be a deemed employee they will be subject to a higher tax bill and their income can be reduced by 25% which adds up to quite a few thousand pounds.

The original IR35 was brought into place in the year 2000 but was viewed as mismanaged which is why the newer version was brought in for the public sector in 2017 and will be rolled out to the private sector on the 6th April 2021. This is causing many contractors to look at their options. These might include umbrella companies, becoming sole traders or moving into full employment.

What some people are not aware of is that if a worker has a project that is inside IR35 and one that is outside the remit of the legislation, then the processes they have in place must account for both situations. Because people are unaware of this fact, this is starting to have a detrimental effect. It is becoming harder for companies to find contractors because they have been scared away from their previous way of doing business for fear of the impact on their earnings.

The new legislation has sent shockwaves through the workforce, with many people confused and scared about what it means for their careers and earnings. A lot of people who were formerly contractors are returning to the workforce and this is sure to have knock-on effects, ones that the government may not have counted on.

IR35 could very well result in pay rises. Ex-contractors with valuable experience, accustomed to uncapped wages, will balk at the salaries on offer in full-time employment. Companies will have to offer higher (if not as high as the ex-contractor is used to) remuneration to secure these candidates. This could have a knock-on effect for wages across the board.

Not just because of the experienced workers re-entering full-time employment but also because their actions are causing a drought of contractors, so the few contractors who remain can demand more money if companies still require project-by-project contractors.

A positive in all of this is that it is kick starting projects. Not only the stalled projects due to Covid-19 but because they are now on payroll, companies are confident to go ahead with projects that they perhaps could not find the budget for previously. Once an ex-contractor finishes one, another must be found in order to make the expenditure make business sense.

Loss of productivity is an obvious off-shot from IR35. Why would a contractor, used to £100k+ in their bank account, work just as hard for a portion of that? Even though companies will pay more, they will not be matching the original wage, so an employee who was well-paid and had a degree of autonomy will feel that their work is not as valued as it once was, even though the company is not really at fault. Of course, there will be some ex-contractors who will work just as hard, but psychologically, it won’t make sense to many. The impact on productivity is just one part of this potential future. With less money comes less commitment in all aspects. Ex-contractors will now be on the look out and applying for jobs in order to earn more, which means that companies may waste more time getting new employees up-to-speed on their projects before the employee decides to leave for another job with a better salary and better perks.

Only time will tell if these problems will sort themselves out with unforeseen solutions becoming clear to the problems we have mapped out here.

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