Overcoming IR35 Changes with Global Development Teams

Businesses across the globe are looking to transform and they’re aiming to do so fast. For many, the upcoming IR35 changes couldn’t have arrived at a worse time, considering that the drive to transform has been hastened by the coronavirus restrictions.

The changes present a challenge for businesses working with contractors to overcome. With the unpredictable shifts in ways of working (and hiring) over the past 12 months, it’s another challenge for business and sector-specific talent to tackle head on. And, with Brexit also presenting roadblocks in the way businesses hire IT talent, we explore whether leveraging global development teams could be a sure-fire solution for businesses to meet their strategic objectives.

What is IR35?

You might be wondering what these changes actually are, and if so, you’re both in the right place and perhaps fortunate not to have to navigate them. IR35 refers to “the UK’s anti-avoidance tax legislation designed to tax disguised employment at a rate similar to employment.” The primary objective of the legislation is to close a loophole in the tax system where employees use a limited company structure to pay less tax. Before IR35 was introduced, workers who owned their own limited companies were allowed to receive payments from clients directly to the company and to use the company revenue in the same way as any small company.

What do the IR35 changes mean for companies?

While contractors who work through a limited company (e.g. John Smith Ltd) don’t usually get employee benefits (like holiday and sick pay), they enjoy a higher degree of flexibility and control over their work, and most importantly a lower rate of income tax. This can also be an attractive arrangement for companies as they will make savings on employer’s National Insurance contributions, as well as other aforementioned outlays such as holiday pay, parental leave, and sick pay.

Some contractors and their clients have been taking advantage of this by operating as if they (John Smith in our example) are self-employed, when for all intents and purposes they’re operating as employees. In other words, ‘disguised employment’. The upcoming IR35 changes seek to close this loophole and attempt to move these ‘disguised employees’ to full-time employment contracts, increasing the financial outlay for both parties.

The changes coming into force in April 2021 will make it more difficult for private sector firms to attract the top-tier contractors they’ve been able to call upon for years as the contractors increase their rates to offset higher tax payments. And, the companies themselves will become liable for additional benefits such as holidays, pension, and NI contributions.

What do the IR35 changes mean for the contractors?

If a contractor provides services to a medium or large-sized non-public sector organisation, the contractor will no longer be responsible for deciding their employment status for tax purposes — the client will now decide this. In a survey conducted in 2020 by British recruitment firm Salt, 42% of respondents expressed that they would leave their role if it was determined that they would fall under the definition of ‘disguised employee’.

Read the full article at: https://thescalers.com/overcoming-ir35-changes-with-global-development-teams/