In 2020 the Government will change the way contractors and freelancers are taxed via changes to the IR35 tax legislation. Currently IR35 is essentially two sets of legislation that apply to freelancers and contractors who are not employed by a public sector organisation, but work solely for them over long periods of time. Instead of individuals being able to submit their tax return through a limited company, they’re instead taxed by the company they’re working for as the Government deems them to be an employee.
Changes coming in 2020 will have an impact on both freelance white collar operational positions and commercial staff, as the Government aims to remove any tax advantages.
How is IR35 changing in 2020?
The Government feels that there are too many individuals working outside the rules through limited companies, when they’re not actually running their own business. To remove the tax advantages freelancers and contractors can benefit from, the IR35 tax legislation is being extended to the private sector.
Every private company, excluding small companies, will be required to consider whether their contractors and freelancers are actually employees. They’ll need to assess their status on a number of different factors, and if they’re deemed to be an employee then the company must deduct National Insurance Contributions and income tax from their pay, plus pay their own NICs. It puts the emphasis on the company rather than the individual to ensure they’re compliant.
How will IR35 changes impact contractors, freelancers and limited companies?
Reduced Earnings – The reason many freelancers and contractors are advised to set up a limited company, even when working for just one client, is because of the tax advantages. Without those advantages this will potentially reduce your earnings. The Government claims that you are essentially an employee, so you should be taxed as such, even without the typical employee benefits such as sick pay or a pension contribution. The change in legislation is expected to generate over £1billion, making it a key initiative from the Government.
Changes To Your Tax Return – It could make tax return season a little more difficult! For example, if you’re an Estimator working primarily for one client you might be taxed directly under the IR35, however you may also do work for other clients. Before you could consolidate all your earnings in to one tax return however now you may be taxed through the client and be required to submit a separate tax return for other earnings. If you do only work for one client though, this could be beneficial for you as it should stop the need for you to submit a return.
Talent Shortages – Critics of the scheme have suggested that the new legislation will lead to talent shortages within the industry, particularly in white collar operational roles. The thinking is that individuals who were used to making more money and paying less tax will consider roles abroad rather than working on projects in the UK.
Fines For Non-Compliance – The changes impact the clients you’re working for, as there are fines for non-compliance. Instead of an individual assessing their own employment status when
submitting their tax return, private companies will be required to use the CEST tool to assess how they should tax each individual.
Projects Halted – Another concern about the introduction of the IR35 tax legislation is that companies may decide to put construction contracts on hold as they work out how to balance out the additional costs.
There’s no doubt that the changes to the IR35 tax legislation will be a disruptor in the construction industry.
If you’re a contractor in the construction industry and you’re looking for a new opportunity then get in touch with CNM Recruitment. We specialise in construction recruitment and cover the broad spectrum of temporary, interim, permanent and contract roles. Call us on 01274 945800 or email email@example.com and we’ll be