Proposed Changes to IR35 Rules: What They Mean for Productions
While the IR35 rules appear to be here to stay, the UK government has launched a consultation (running from April 27-June 22) which could see the resolution of a flawed tax rule that currently affects both end clients and contractors.
What are the IR35 rules?
The Intermediaries Legislation, known as IR35, aims to identify whether a contractor providing their services through an intermediary (such as a loan-out) carries out their work as a self-employed individual or in a way that reflects an employment arrangement and relationship. Essentially, their contract can be classed as being either inside or outside IR35.
Working outside IR35 means that a contractor is responsible for paying tax as a self-employed person. Working inside IR35 means that they’ll be taxed as an employee for that contract and that the end user (perceived employer) will be responsible for deducting income tax and NICs through PAYE.
What’s the issue?
While the idea behind IR35 makes sense (i.e., that contractors who act and work like employees should pay tax like employees), the way in which the rules have been implemented has caused problems for production companies and freelancers alike.
To maintain IR35 status, contractors can show they are independent of the client’s organisation – for example, by funding their own business costs. But the distinction isn’t always black and white, and this uncertainty can cause issues.
If HRMC deems a contractor to have been incorrectly classed as falling outside IR35, and believes that they were working in the same way as an employee, the end client (i.e., production company) is required to pay the taxes that are owed, even if the contractor has already paid tax on this income. The result is that HMRC receives more tax than it is actually owed.
How does this affect the film and TV industry?
In the film and TV industry, where productions rely heavily on a freelance skillset, laws that determine the relationship between a client and contractor are particularly relevant. As the nature of the work requires specialist individuals to work for short periods, the industry has always relied on contractors for everything from entry-level positions all the way up to senior roles both on screen and behind the scenes. According to the British Film Institute, in 2019 54% of people working in film and video production were self-employed, compared with just 18% of the total UK workforce.
This begs the question: what would these proposed changes mean for our industry?
Thankfully, this development might give hope of predominantly good news for both production companies and contractors.
For production companies, there has always been the risk of double-taxation if HMRC deems the freelancer to be inside IR35. For risk-averse and budget-conscious productions, (if and when it does transpire) the removal of this risk is positive.
The proposals may also provide comfort to production companies that are nervous engaging contractors on outside IR35 contracts, which is good news for production freelancers who want to be treated as self-employed.
However, it’s also important to note that it will be difficult for HMRC to know how much tax has been paid by a contractor, as it depends on a number of factors including their expenses. HMRC may therefore require information from the production company, which would require time and resources to collect.
While these are only proposed changes, the short consultation window of only eight weeks, followed by a response later this year, is being seen by experts as a sign that they're likely to become law. If successful, the government will implement a legislative solution from April 6, 2024 (i.e., the start of the next tax year).
Keep an eye on the EP Legal and Compliance page for updates. In the meantime, contact EP if you have questions around compliant UK production.