IR35 changes: stay compliant to contractor rules with Sparta Global

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In 2017 HMRC introduced changes to IR35 ‘off-payroll’ rules that would impact the public sector’s use of contractors. With these amendments to be extended to the private sector in April 2020, what does this mean and what can our clients do to prepare in advance? We sat down with Sparta Global Director, Chris White, to find out more…

What is IR35?

At its most basic, IR35 is a piece of legislation designed to tackle tax avoidance from 'disguised employment'. This is where self-employed contractors have set up limited companies in the past to pay themselves through dividends – something that is not subject to National Insurance.

The legislation was first introduced in 1999, but in the 2016 Autumn Statement, chancellor Phillip Hammond announced public bodies using contractors would be responsible for IR35 enforcement from 6 April 2017.  However, responsibility can vary depending on sector and this makes IR35 compliance slightly more complex. 

How do IR35 changes impact the public sector?

In the public sector, IR35 status will now be determined by the client and not the contractor - putting the burden of responsibility on the entity that pays the contractor. In many cases this will be a traditional agency, but agencies are unlikely to have sufficient information about the working practices of their contractors so will ask the client to give an opinion on IR35 status.

With the complexity of IR35 rules, clients are less likely to know for certain whether the engagement is ‘inside’ or ‘outside’ IR35. These terms indicate a contractor’s IR35 status as being a genuine contractor (outside) or an employee for tax purposes (inside). As clients or agencies will become liable if they make the wrong determination, they are more likely to take a risk-averse approach and decide to apply IR35. In short – this means paying more tax.

How does Sparta Global’s model counteract the confusion around IR35 compliance in the public sector?

Our business model is the perfect way for clients to access the IT talent they need, without the risk of IR35 non-compliance. Our business model means our IT consultants are employed full-time by Sparta Global - covering their training and at least two years of project work. This means our consultants are IR35 compliant throughout their time on client site. Should our clients want to keep hold of our contractors on a more permanent basis, they can be easily transitioned to permanent members of staff, with no overlap for tax confusion.

The private sector is also due to change responsibility for IR35 compliance from contractor to client, what does this mean?

When the government introduces a change to IR35 legislation in April 2020, private sector contractors will be subject to the same rules that contractors have been working under in the public sector.

Many IT companies have responded to the news by preparing to axe the number of contractors they use – due to general confusion around how the IR35 changes will come into effect and what this will mean for their contractor costs. Apart from software development businesses, financial services companies hire more IT contractors than any other sector and it is likely they will feel the biggest pinch from IR35 changes. While we understand the fear amongst organisations that rely on contractors for expert technical skills, our model has been designed to remove that fear and the risk of non-compliance, all while continuing to supply clients with a skilled pipeline of UK tech talent. 

If you want to find out more about our track record in Public Sector IT consultancy, read about our work with Ministry of Justice here.