In 2017, new rules around off-payment working (known as IR35) were introduced across the public sector. From April 2020, these rules will be extended to all private sector businesses.
Many contractors working in the pharma and life sciences industries are concerned about these rules and how they will be affected.
What exactly is IR35?
The IR35 legislation was implemented by HM Revenue and Customs (HMRC) to help ensure that all individuals who work in a similar way are taxed and pay National Insurance contributions fairly.
The rules are designed to differentiate between genuine contractors, freelancers or consultants and ‘disguised’ employees of a company who are simply trying to avoid paying the right amount of tax.
‘Disguised’ employees are those who behave exactly as employees of a company but take advantage of tax efficiency by claiming their pay through an intermediary; often a limited company. In a nutshell, if the intermediary did not exist, would the contractor be an employee of the company?
With the new IR35 rules, it is the responsibility of the business to determine the tax status of their contractors, rather than the contractors themselves. Companies who ignore these tax loopholes will risk being fined, as well as having to settle any unpaid income tax and national insurance.
Why did the HMRC introduce these changes?
In recent years, there has been a surge in the number of people contracting, rather than working in full-term employment. While there are many reasons for this increase, some of it has been driven by ambiguous legislation allowing contractors to take advantage of tax benefits.
The HMRC estimates it would lose £1.2b annually by 2022/23 of income tax and national insurance contributions. By cracking down on ‘disguised’ employees, they hope to force them to comply with their tax responsibilities and close the loophole in the current legislation.
Who do the IR35 rules apply to?
The IR35 rules apply to:
Contractors working for public, and now private, sector organisations
The company hiring the contractor (called the 'end user')
Intermediary fee payers, normally an agency, who make the required deductions and declarations prior to paying the contractor
Small businesses are exempt from the IR35 rules. The legislation will not apply if a company meets two of the following criteria:
Their annual turnover is less than £10.2 million
Their balance sheet is less than £5.1 million
They have fewer than 50 employees
However, it is still important for small businesses to remain aware of the IR35 regulations, as they will apply once they grow.
When did the IR35 come into effect?
The IR35 legislation came into effect on 6th April 2020.
What does ‘inside’ or ‘outside’ IR35 mean?
If a contractor is defined by the HMRC as ‘inside’ IR35, this means that they are essentially an employee of the company. The company will therefore be responsible for deducting the relevant income tax and NICs for HMRC on behalf of the contractor, prior to paying them their fee.
If a contractor is defined as ‘outside’ IR35, the HMRC views them as a genuine contractor, freelancer or consultant and the company they are working for does not have to deduct any additional taxes from their payment.
What does IR35 mean for contractors?
It is expected that the new IR35 regulations will mean that fewer individuals can work as contractors purely to exploit tax loopholes.
However, even with fewer tax advantages, some people will choose to remain as contractors. Freelancing generally offers high pay rates and greater levels of flexibility, as well as the chance to take time off between contracts. Contractors also have the opportunity to work in many different organisations, taking on different responsibilities, learning new skills and making new connections in the industry.
If you choose to remain contracting, working through an Umbrella Company may be a simpler way to manage your contributions than working through a Limited Company.
If you’re unsure about how you will be affected by the IR35 legislation and how to minimise its financial impact on your earnings, we recommend speaking to an accountant.
What does IR35 mean for companies?
The impact of the new IR35 rules means that employers are now responsible for classifying their contractors by issuing a status determination statement (SDS). Where contractors fall ‘inside’ IR35, whoever pays them will become responsible for deducting income tax and national insurance.
Companies who employ large numbers of contractors may find these changes in legislation challenging and time-consuming, but it is important to carefully review all off-payroll workers as non-compliance with IR35 could end up being very expensive.
For more information, we recommend reading the HMRC’s guidance on off-payroll working.
How can MSI Pharma help?
MSI Pharma will be supporting our candidates through these changes, offering guidance and compliant pay solutions.
Whether you are contracting or looking for a permanent job in the pharma, life sciences or medical device industries, MSI Pharma can help you find your ideal next role.
And if you’re a company looking to hire top talent, we can help you find your ideal candidate.