IR35 Changes to the Tax Regime for Businesses Engaging PSC Workers

IR35: Purpose and Evolution

Our recent "Talent & IR35: Get It Right In 2024 + Live AMA" event featured a conversation between Hung Lee, the curator of Cutting Brain Food, and Ray Walker, VP of Contingent Workforce Management at Worksome. The topic of discussion was IR35, a piece of legislation by HMRC that aims to ensure that contractors who work through their own personal service company (PSC) are taxed as employees if they would be employed if it weren't for the intermediary. 

The Impact of the New Offset

IR35 is legislation introduced by HMRC in 2000 aimed at ensuring that contractors who work through their own personal service company (PSC) are taxed as employees if they would be employed if it weren't for the intermediary. This means that if a contractor is working for a client on a long-term basis and is essentially functioning as an employee, they should be taxed as such, even though they are working through their own PSC.

Since its introduction, IR35 has undergone several iterations, with changes made to the legislation to address issues and concerns raised by businesses and contractors. In 2024, the legislation remains the same, but significant changes to the tax regime around it have been made that will impact how businesses engage with PSC workers.The new offset that went into effect on 6 April 2024 will reduce the financial risk associated with engaging PSC workers by around 70%. This means that the financial worst-case scenario of engaging with PSC workers will be less severe, making it less risky for businesses to engage with high-caliber talent.

However, compliance with IR35 is essential for businesses to avoid penalties and fines. It is important for businesses to stay up to date with the legislation and to ensure that they are compliant with all the rules and regulations surrounding it. This means taking a proactive approach to IR35 and working with experts to ensure that all contracts and engagements are structured correctly.

IR35's Ripple Effect: Impact on Talent Acquisition and Retention

During their conversation, Hung and Ray also discussed the impact of IR35 on talent acquisition and retention. Ray noted that the legislation has had a significant impact on the recruitment industry, with many businesses opting to engage with contractors through umbrella companies to avoid the risks associated with PSCs. This has made it more challenging for businesses to access high-caliber talent, particularly in niche industries where contractors are in high demand.

Overall, the session provided valuable insights into the landscape of IR35 in 2024 and offered guidance on how businesses can engage with PSC workers while minimizing risk. By staying up to date with the latest changes in the legislation and taking a proactive approach to compliance, businesses can continue to access high-caliber talent while remaining compliant with the law.

Catch up on the discussion and Q&A below: 

Q: What's the purpose of IR35 for those new to recruitment?

A: IR35 ensures contractors aren't avoiding employee taxes. If your setup is like an employee's, you're taxed as one.

Any significant changes in 2024 prompting policy reviews?

No major changes, but a new offset mechanism reduces financial risk for engaging contractors by about 70%.

So, the offset simplifies things and reduces risks?

Yes, it eases admin for employers and shields contractors from financial penalties in misclassification cases.

The changes seem positive, right?

Yes, the reforms aim to create honesty in PSC contracts without stifling trade.

How can people learn more about IR35 and stay updated?

HMRC provides resources, but there are also companies and advisors who can help navigate the process. It's about finding what works for your business.‍

Any advice for companies wanting to access talent while staying compliant?‍

Adopt IR35 principles and ensure contractors truly work independently. It's about changing working practices to engage outside IR35 workers.

Predictions on how IR35 changes will impact freelancer usage?

The reforms will likely release constraints and make it more attractive to engage freelancers. It's a positive change, signaling IR35 will be around for a while.‍

Are there long-term implications of these changes for companies' hiring strategies?

Long-term, companies will recognize the need to work with independent contractors only for truly independent roles. For those with control over workers, they may shift towards payroll models or utilize recognized suppliers for compliant arrangements.

Watch the full recording and get a complimentary IR35 assessment: 

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*Complimentary assessment is for qualified buyers who hire ten or more freelancers annually.