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How IR35 Will Affect UK Small Business Owners?

IR35 is nothing new and was first introduced in the year 2000 as a way for HMRC to clamp down on the threat of employees posing as contractors for tax avoidance reasons. After years of ambiguity regarding the issue, Chancellor Philip Hammond’s Budget confirmed plans for a reform that is to be implemented from April 2020.


One of the most notable factors is that it is set to extend to the private sector too, which will naturally mean big changes for small business owners that work with freelance contractors and agencies. Here’s all you need to know.


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UK Business Owners Need To Take Responsibility

IR35 isn’t designed to scare small business owners, especially those that are running their ventures with honesty, transparency, and integrity. However, those that are caught bending the rules or failing to comply with the new reforms by getting caught up by a contractor’s shortcoming, you will face fairly severe fines as HMRC come for the money that should have been paid at source.


Given that synthetic self-employment can cost as much as £1.2bn per year, HMRC does take this seriously. As such, small business owners need to accept that employees need to be treated as such, and not contractors using agencies.


UK Business Owners Forced To Increase Pay


UK business owners will need to subtract National Insurance Contributions from the wages of contractors deemed to fall inside IR35. Experts have forecast that public sector workers could lose around 30% of their home takings as a result, and those figures are likely to be very similar for freelancers in the private sectors.


Consequently, then, freelancers will feel forced to increase their charges to compensate for the loss. In turn, small business owners using these forms of employment could be set to see their staffing costs increase without necessarily gaining increased productivity.


UK Business Owners Required To Investigate Agency Agreements

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While the employee/contractor is responsible for investigating whether they fall under IR35 or not, business owners will need to take greater responsibility when dealing with agencies. If you are paying an employee who is not classed as self-employed through an agency, you will need to pay their National Insurance Contributions.


The agency will still be tasked with making those calculations relating to PAYE and NIC deductions. GOV UK has provided an online tool to help business owners (as well as workers and agencies) check the employment status regarding IR35 regulations.


The Good News


Owners of genuinely small businesses may be exempt from the IR35 reforms. As per the Companies Act 2006, companies are deemed small if they have a turnover of under £10.2m, fewer than 50 employees, and £5.1m or less on its balance sheet (or at least two of those three elements) they will be exempt from the changes. However, the criteria could change in regards to IR35.


Nonetheless, this is major change ahead and even the small companies that feel as though they don’t need to worry should use the next year or so to conduct the necessary research. Moreover, they should still take responsibility when hiring freelance contractors and agencies.


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