The proposed IR35 reform (which some consider highly controversial) represents the most significant change to the employment tax code for decades. This could have serious implications for both small and medium-sized businesses and the contractors they hire.
Until now, British companies were able to leverage contractors for a variety of reasons. The new law is basically tax avoidance legislation designed to plug all the holes in the system.
So from April 2020, the private sector will also have to follow the same rules as the public sector when it comes to IR35. [Update: UK government has put IR35 tax reforms on hold for a year in the wake of coronavirus crisis].
For startups and small business owners trying to navigate through this maze of new rules and regulations, leveraging nearshore resources can help mitigate risks while successfully meeting their business goals.
But before we get ahead of ourselves, let’s define it.
What is IR35?
IR35 is tax legislation that aims to tax “disguised employment” at a similar rate to traditional employment. It’s designed to ensure that professionals don’t use a limited company structure to avoid paying standard taxes and National Insurance (NI) contributions.
However, like most laws, it’s subjective in nature, and employers will be held responsible for determining if IR35 applies or not. This is already the reality in the public sector. Now it’ll be the same for every organisation in the country.
For example, if a freelancer is providing services to you through their own limited liability company, but working just like another employee, they will now be considered to be “inside IR35” and will have to pay additional taxes.
For startups, this can be a tricky issue. They have to depend on contractors to fill the skills gap, but if they aren’t treated as fully-fledged employees (with the additional costs and responsibilities), they risk hefty fines.
It’s still early days, and there’s a genuine concern across industries that these changes will lead to an exodus of IT professionals. In this scenario, they take risks on the unfair burden of paying additional taxes, so it makes sense to expect them to go elsewhere.
First, it was Brexit, and now it’s IR35. What do you have to do to develop robust software in 2020? There are a couple of options.
How Do You Mitigate IR35 Risks?
In a bid to avoid hefty fines, small businesses and multinationals are now in a rush to make the switch from off-payroll to a Pay As You Earn (or PAYE) model. Even Barclays moved all their IT contractor roles to PAYE almost immediately.
“IR35 is a nightmarishly complex piece of legislation – so complex that Barclays has decided it cannot manage the risk of falling foul of it. The approach from Barclays makes a mockery of the government’s claim that the genuinely self-employed won’t be affected by the April 2020 rules,” – Andy Chamberlain, Deputy Director of Policy and External Affairs at the Association of Independent Professionals and the Self-Employed (IPSE)
If history is anything to go by, this will make businesses less competitive. They may also walk away because they will be subjected to the Mutuality of Obligation. For example, contractors (unlike employees) can choose where and how they deliver work. The “client” is also not under any obligation to offer them more work.
Those who stay on will increase their rates to offset the impact of this new tax legislation (just like they did in 2018 when the public sector made the switch).
So what’s the alternative?
Nearshore Resources to the Rescue
If contractors refuse to make the switch to PAYE or maintain their current rates, it can be a challenge to meet the demands of the market. This can cripple any business trying to create, innovate, and disrupt traditional processes.
However, by leveraging nearshore resources, they can effectively mitigate risk and develop digital solutions cost-effectively.
Working with an established nearshore provider eliminates the risk of running afoul of IR35. If you work with an extended team in technology hubs like Ukraine, you can access top tech talent affordably and within the law.
What’s best about this business model is the fact that you will remain in control of your project. It also negates the need to understand and navigate the complexities of this tax avoidance legislation.
However, if you decide not to make any changes by April 2020, it’s imperative to do the following:
- Review all your relationships with contractors (and hire an HR/tax expert)
- Thoroughly go through your terms of engagement and make sure that you’re in the clear
- Provide all contractors their Status Determination Statement
- Whenever your contractors fall within IR35, change their status to employees or let the go
Find out how our nearshore resources can help you gain a competitive advantage while mitigating the risk of IR35 violations.