The Budget earlier this month brought new and stricter IR35 guidelines for contractors working within the public sector. IR35 rules determine whether a contractor should be treated as a company or an employee for tax purposes and have been extremely controversial since their introduction by Gordon Brown back in 1999.
IR35 aimed to prevent tax avoidance by individuals who effectively work full-time for one organisation and therefore should be on regular PAYE. However, by setting up a personal service company and invoicing for their work, they avoid PAYE and it allows a much lower tax bill for themselves. Such contractors typically pay themselves a low wage, but take high dividends after their company is taxed at lower corporate rates. This practice is considered by many to be acceptable as the contractor is not afforded the benefits of being an employee (notice periods, holiday pay and sickness benefits) but are rewarded by a lower tax burden and higher take home pay.
The new rules are being challenged by Conservative back benchers many of whom believe it stifles entrepreneurial activity. But if the changes survive the commons they will potentially have a huge impact on employers and contractors within the public sector. As of April, new HM Revenue & Customs (HMRC) guidance come into force, whereby the public body commissioning services determines if a contractor falls within IR35 – and hence should be treated as an employee on PAYE.
This will have a potentially huge impact on these organisations. As more and more individuals need to begin working as employees rather than contractors the burden on the employer to carry out the right compliance checking is crucial, not to mention the increased demand placed upon HR, payroll and accounting within the organisation.
With the burden and legal responsibility falling squarely on the employers’ shoulders more and more companies will be seeking to either upskill their internal HR resource or look to outsource these complicated HR challenges to an outsourced accounting and finance services partner such as IMS Decimal.
IMS Decimal specialize in this kind of service and can step in to empower companies facing this kind of challenge at very short notice. Their highly skilled accounting teams can minimize the cost of managing these changes within an organisation and leave the management free to focus on the strategic growth of the business.
In a time of change it will be interesting to see which companies adapt efficiently to the legislative changes. Thankfully, with the help of outsourced accounting and finance services providers like IMS Decimal, companies can adapt to the changes with the minimum of effort.