In April 2020, a new tax law comes into effect which will directly impact the private sector and many smaller sub-contractors. It relates to IR35 status with the responsibility of PAYE and National Insurance payments shifting to the employer or fee payer. The status of an employee or subcontractor will directly impact how they are taxed which may see many freelance contractors who don’t operate through a Personal Service Company having to rethink their way of operating or risk having to pay significantly more taxes.

What’s changing?

The changes impact any company with more than 50 employees and a balance sheet of more than £5 million or turnover of £10 million.  Freelance contractors or interims who don’t qualify as being genuinely self-employed may have their income reduced by as much as 25% as their tax increases. This is will be as a result of them having to become permanent employees. Essentially for anyone who has a long term contract exclusively with one company, the new tax law does no longer defines them as a contractor but rather as a full time employee and taxes them accordingly. However, freelance contractors that consult with multiple clients, take on shorter contracts or operate through a PSC may still qualify as being self-employed.

What’s the industry impact?

Currently a large portion of main contractors employ a wide range of freelance contractors, some even in senior executive positions, how these contracts are structured may result in employers having to take on more administration in terms of how PAYE and the National Insurance contribution is administered. The primary challenge is while the new tax laws are strict they are not clearly defined. What is a short term contract, for example? 2 months or 2 years? It will be almost impossible for private companies to evaluate each and every contractor case in their supply chain individually, because there are so many and they all vary greatly. Yet at the same time taking a blanket approach may not be acceptable in terms of the new law.

Companies and contractors alike will need to do their research on the new tax law if they don’t want to lose out or potentially have to pay much more in terms of admin costs and taxes or earn less. New contracts will also require closer scrutiny. If you need guidance on the best hiring options, feel free to give us a call. The team at Ellis Fox will be glad to discuss your hiring needs. Tel: 020 7183 0255 email: team@ellisfox.co.uk.