This week, Chris Biggs Managing Director spoke to Money Marketing to offer his thoughts on what IR35 will mean for self-employed financial advisers and the financial services come April. The overall impact to businesses will depend on the size of the firm, number of contractors employed and how this number changes after April. He noted that he is seeing many companies opting to cut down on the number of freelance contractors in order to actively plan ahead of the new rulings coming into effect.
Expert view: Businesses must address IR35 compliance now or face the risks
Theta Financial Reporting managing director Chris Biggs
The overall impact to businesses will depend on the size of the firm, number of contractors employed and how this number changes after April. Personally, I am seeing many companies opting to cut down on the number of freelance contractors in order to actively plan ahead of the new rulings coming into effect.
As it currently stands, there isn’t much information on actual fines levied on firms where HMRC’s ruling goes against them. However, there have been a number of high-profile fines noted in the press, such as NHS Digital’s multimillion-pound fine late last year following HMRC’s decision that it had set its contractors’ IR35 status incorrectly. HMRC will consider a range of factors and evidence when issuing fines and determining the fine’s magnitude, so depending on the severity, the fine could be significant.
Putting aside penalties, where contractors are deemed to be ‘employed’, the businesses employing them will have to deduct income tax and NI from payments made to the contractor and also pay employer’s NI. The employer’s NI would impact negatively on that business’s bottom line.
It remains to be seen whether contractors will be prepared to accept being taxed as an employee without receiving the same employment benefits as an employee; they may well expect to be treated equally to employees following any change in tax status, and there could be additional costs to the business associated with this.
Additionally, the business employing the contractors in question may incur additional costs in processing payments to contractors deemed to be within IR35.
Rather than paying contractors’ invoices directly, with the contractor being responsible for paying their own tax, the ‘employer’ may need to enrol the contractor on their payroll system to facilitate the correct calculation of PAYE and NICs.
If it is not practical or desirable to enrol ‘non-employees’ on to the payroll system, the business may have to incur additional cost in paying an intermediate company to perform this function.
Although I can’t comment on specific firms, large firms who utilise contractors who are subject to IR35 and depending on the structure of their engagement of such contractors together with their deemed IR35 status, could see an impact to their bottom line.
In my view, there are also important wider commercial business model impacts resulting from the change to the flexibility offered by using contractors, particularly in specialist areas. In regard to share price, similar firms in the marketplace with equal usage and engagement of contractors will likely be in a similar situation and so there may be a similar impact.
The need and effort to perform assessments will be considerable and those firms behind the curve in doing this will find themselves facing substantial risks.
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