Does IR35 affect the third sector?
The changes to IR35 in the private sector have impacted the way many contractors and end-clients operate. But how has it affected the third sector and charities?
The Charity Tax Group (CTG) urged charities to prepare well in advance of the IR35 roll-out in April 2021 (1).
The reason being that charities may not meet the turnover threshold, but they could still become responsible for determining the IR35 status of their contract workers by falling under the other two thresholds relating to their balance sheet and their number of employees.
- Annual turnover of £10.2m or more
- Balance sheet of £5.1m
- Over 50 employees
The key change in relation to private sector IR35 was the shift in responsibility for status determination from the contractor to the hiring party.
Shifting responsibility for determining a contractor’s tax status
An article by peoplemanagement.co.uk states, "It has shifted the responsibility for determining a freelancer’s tax status from individual freelancers to their clients and has caused mass confusion and uncertainty as a result" (2). They went on to say from their own research, "IR35 has been so damaging to freelancers that a third of contractors have been driven out of self-employment since the reforms" (2).
Indeed, a recent contractor research survey by Caunce O'Hara found out that as many as 60% of contractors have seen the number of work opportunities decrease, while the same percentage of contractors also saw their income drop (3).
According to figures released by the Office for National Statistics (ONS), the self-employed sector as a whole has contracted in size in eight of the past nine quarters, from a high of 5.025million in Oct-Dec 2019 to 4.232million in Jan-Mar 2022 (4).
While IR35 cannot be solely blamed for this contraction - Coronavirus has certainly contributed to a drop in work opportunities - it can certainly take the lion's share as the sector was shrinking before Coronavirus struck.
How many charity organisations are likely to have been affected by IR35?
As highlighted earlier in this article, the IR35 thresholds mean that it is only the medium to large charities that are affected by the off-payroll working legislation.
As of 14 April 2022, there were 168,961 main charities registered in the UK and a further 15,092 linked* charities, totaling 184,053 (2).
*A 'linked charity' is a charity that is linked to another charity (the 'reporting charity'). For example, if two charities have the same board of trustees, they can apply to be linked (7).
Approximately 50% of all charities have an income of less than £10,000 per annum, while over 80% of all UK charities have an annual turnover of less than £100,000 (5), with small charities making up approximately 96% of the UK voluntary sector (6).
Whilst these figures hint that only 20% of charities might being affected by IR35 (that's still approximately 35,000 charitable organisations), it disguises the fact that charities are reliant on workers, and even an organisation with a relatively small turnover can employ a lot of people and even amass a healthy balance sheet over time with astute management.
Hence why the Charity Tax Group were vocal about charities needing to prepare well in advance of the IR35 rollout on 6 April 2021.
In conclusion, for those charities who do fall within the 20% potentially affected by IR35, the changes in legislation mean more work for your staff who will take on the responsibility of assessing and determining contractors IR35 status, by producing a Status Determination Statement (SDS).
To do this, charities must first educate themselves on the legislation and understand the factors determining a contractor’s IR35 status. You can learn more about IR35 factors here.
Protecting your charity with Markel Direct’s charity insurance
Charity organisations can protect themselves with Markel Direct’s charity insurance, which has been designed specifically to cover small charities, community groups and not-for-profit organisations from their daily business risks.
Charity insurance offers cover against a range of risks facing your organisation, including:
- An accident involving a visitor at a fundraising event, resulting in a personal injury claim being made against your charity (charity public liability insurance)
- An allegation of wrongdoing against a charity trustee and a subsequent investigation by a regulatory body (trustee indemnity insurance)
- A volunteer injuring themselves while working for the charity and being unable to work (employers' liability insurance)
- A service user alleging the charity provided sub-standard services and making a claim for compensation (professional indemnity insurance)
Few charities have the financial strength to pay the costs, damages and any awards made against them in the event of a claim. Charity insurance provides cover against these scenarios, giving you the peace of mind that if something unexpected happens, your organisation will be covered.
Understanding the different types of insurance available to your charity can be confusing. If you’d like more information covering what insurance your charity should consider, you can find out more by following the ‘decision tree’ in our charity insurance guide.
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