Changes to IR35 rules shake up contracting community

Gordon MacLure

Gordon MacLure

Restructuring Partner

This article by Gordon MacLure originally appeared in the Press & Journal.

Many forecasts are now predicting nearly half of the UK’s workforce will be freelancers within the next decade, but significant changes to off-payroll tax will impact the booming ‘gig economy’.

Freelancing and contracting have really caught on in recent years with estimates suggesting up to 15% of the UK’s working population is now self-employed, according to the Office for National Statistics. The benefits for freelancers are clear to see: flexible working, self-determination and increased income potential.

The burgeoning movement towards flexible working is not new across the North East, where the oil and gas sector has traditionally been well-stocked with contractors to suit off-shore work – fluctuating demands, project-based work and the need for a flexible resource. Contractors in oil and gas represent around a third of the workforce.

Now those workers – as well as five million people registered as self-employed across the UK – undertaking work through a limited personal service company could potentially be impacted by changes to IR35 ‘off payroll’ rules.

IR35 is an anti-tax-avoidance rule impacting contractors and freelancers who don’t meet HMRC’s definition of self-employment. Implemented in April 2017 for the public sector, it is a move designed to tackle the ‘disguised employee’, who fulfils a permanent position within a company but doesn’t pay corresponding income tax and National Insurance contributions (NICS).

Instead of contractors themselves being responsible for determining their IR35 status, this obligation has been handed to the employer. As a result, where a worker is deemed to be ‘inside IR35’, the employer then deducts employees’ NICs and tax from the contractor’s pay, as well as paying employers’ NICs. However, those who agree to work ‘inside IR35’ contracts won’t be compensated with the employment rights that their status warrants.

These rules have shaken up the public sector self-employed community and come into force for the private sector in April 2020.

As of March 2017, there were an estimated 365,600 private sector enterprises operating in Scotland. Almost all of these enterprises (98.3%) had between 0 to 49 employees, according to research published by the Scottish Government.

Numerous contractors and SMEs have successfully managed their own companies, tax affairs and careers through a limited company for many years – what does the future hold for these companies from next April?

“Sometimes the questions are complicated and the answers are simple”, but this isn’t one of those times, unfortunately. There are a wide range of options available to those that have limited companies which, effectively, may be forced to cease trading after the enforcement of the new IR35 rules.

A Members’ Voluntary Liquidation (MVL) offers one such available route: the shareholders of a solvent company appoint a liquidator to distribute the remaining capital efficiently and quickly which could otherwise be tied up in the company or subject to potentially penal tax rates otherwise.

With just over a year to go, companies need to act now to prepare for the storm ahead and ensure they are well-positioned to deal with the changing self-employment landscape.