IR35 is the legislation that decides whether a contractor is genuinely a separate entity to the business they contract for or whether they are an ‘off-payroll employee’ that is just attempting to avoid tax by operating through a Ltd company. There was a major change in the legislation back in April that saw many contractors lose 10-40% of their income but it only affected those who contract in the public sector. When the changes were first announced most accountants and tax specialists agreed that HMRC were unlikely to bring this into the public sector if they weren’t planning on bringing it into the private sector at some point but HMRC were adamant that they had no such plans. More recently HMRC were asked the question again and instead of denying that they planned to bring the changes to the private sector they suggested that they were currently focusing on the public sector but they would like improved compliance in the private sector. This suggests that it will be coming and there are many experts in this field suggesting that it could be announced in the budget next month.
What is the effect of being deemed ‘within IR35’?
The new legislation basically put the responsibility of IR35 in the hands of the public-sector bodies rather than the contractors themselves. It’s been 6 months and it’s still difficult to see exactly how contractors, the public-sector bodies or HMRC are reacting to this but one thing is clear, a significant number of contractors are losing out and even being forced into career changes. So far most of the public-sector bodies have just assumed that everyone that they are not 100% sure about comes under IR35 to ensure that they do not get a large tax bill in the future if they deem a contractor to be genuinely self-employed but HMRC disagree. This means that a contractor that was billing £2k + VAT and receiving £2,400 would now have PAYE tax, employees NI and employers NI deducted from the £2k so they would likely receive around £1,600 + £400 VAT.
These changes have been considered unfair or too harsh by most tax and finance professionals because if a contractor falls within IR35 they not only pay more NI than a regular employee because they have to pay their employers NI as well as the employees, but they also get none of the benefits of being an employee like sick pay, maternity pay or company pension. On top of this they still have to deal with the administration and costs associated with running a limited company like bookkeeping and accountancy fees so many contractors are forced to close their companies and work full time PAYE jobs.
Will you be affected?
IR35 has to be re-evaluated every time a new contract is started and will depend partially on what is in your contract but also on how you actually operate on a daily basis while working. If HMRC investigate a contractor that they believe is within IR35 they will look at one main question: If the limited company was taken away so the individual worked directly for the business, would they be an employee or a self-employed worker? To answer this question, they will look at the following points:
- Do you have professional indemnity insurance?
- Do you use your own stationery and equipment?
- Do you control what hours/days you work?
- Are you liable to provide a substitute if you couldn’t complete your work?
- Are you paid a fixed weekly or monthly fee?
- Do you have a work email address provided by the business you work for?
- What percentage of your work is done for the company in question?
- Can you simultaneously work for someone else without breaching the terms of your contract?
- Can you sub-contract your work out to others?
- Do you manage employees of the company you contact for?
- Do you use company canteen, carpark or attend staff functions?
How to reduce the chance of being deemed within IR35
Historically IR35 has been very difficult for HMRC to enforce but if the rumours prove to be true and the public-sector changes are brought into the private sector then bolstering your IR35 defences would be a good idea. While getting an ‘IR35-proof contract’ is not 100% effective, it’s a great start and with the disruption caused in the public sector by the changes, IR35 specialists offering contract reviews are becoming more widely available and sophisticated. We work with Other fairly cheap and quick options would be things like buying professional indemnity insurance or setting up an agreement with another contractor to potentially pick up each other’s work should either of you be unable to do it.
We offer a comprehensive contract review from £125 (£150 for public-sector) that involves contract specialists evaluating your contract, listing any changes you need to make and giving you clear and concise advice on how to proceed. If you require any more information please do not hesitate to contact us.