The main underlying issue HMRC has is that when hirers engage contractors via limited companies they do not have to pay secondary class 1 national insurance contributions, also called employers NI, which HMRC are seeking to claw back.
Under the original IR35 if the contractor is “inside IR35” then they are required to pay both the employers NI and employees NI, effectively a double national insurance charge.
But, under the new legislation, for contractors inside IR35, the hirer is now responsible for paying employers NI on top of the amount paid to the contractor which must be treated as employment income, or salary. And employers NI cannot be lawfully deducted from the contractors agreed fees.
The only way the hiring firm can avoid an increase in costs due to the extra tax charge, is to reduce the contract rate, which will affect the talent they can attract.
And for firms that need to attract contractors from far-afield who have considerable travel and accommodation expenses, the impact is more severe, because contractors can no longer claim these expenses against tax, in which case they may seek further rises of up to 40% to account for this loss.
In a nutshell, market forces dictate that it is likely to be more expensive to hire contractors “inside IR35” compared to “outside IR35.
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