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New IR35 tax rules are coming but are businesses ready?

12 January 2021

A survey has found that more than half of UK firms that hire independent contractors have yet to prepare for new off-payroll tax rules that will come into effect in a matter of weeks.

New IR35 off-payroll rules affecting contractors are due to be introduced in April 2021 in the private sector. Firms that employ contractors must use the government's CEST tool to determine whether or not contractors are "inside IR35" for tax purposes.

However, a new poll of more than 3,000 contractors, conducted by IR35 Shield, suggests that many firms are not ready for the changes. The findings show that 52% of in-work contractors have yet to be assessed for IR35.

Worryingly, fears around non-compliance have prompted as many as one in four firms to introduce blanket bans on using contractors. Only 32% of contractors are confident that they will remain with their current client after April 2021 and 57% said at least half of contractors are likely to leave their client due to IR35.

At present, the findings show that 52% of firms are using HMRC's CEST tool, but 41% of contractors said they will dispute an "inside IR35" result. Three-quarters of those polled said the CEST tool was inaccurate. In addition, 65% of contractors say they will avoid "inside IR35" contracts altogether.

Many hiring firms and agencies have sought to get around their compliance requirements by offering contractors alternative engagement models. However, although 62% of those polled said they had been offered the chance to trade via an umbrella company, only 8% said they are happy to do so and 61% said they would not apply for an "umbrella only" contract.

Since April 2020, agencies have been legally required to provide each worker with a Key Information Document (KID) but the findings show that 86% of contractors weren't provided with a Key Information Document for their last contract and 67% of respondents were not even aware of what a KID is.

Dave Chaplin, ceo of IR35 Shield said: "We have just a few months until off-payroll takes effect in the private sector and it seems that half of the market is leaving compliance until the very last minute. This is likely to cause some severe repercussions for hirers and contractors.

"Blanket bans on limited companies are an expensive way for firms to hire less talented professionals, whilst handing a competitive edge to their competition. Firms need to realise that if they apply best practice and with the correct contracts in place, they can continue to hire the best contractors with confidence."

Written by Rachel Miller.

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