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 17 that saw many public sector contractors lose 10-40% of their income and when the changes were first announced HMRC were adamant that they had no plans on bringing it into the private sector. In October’s budget it was announced that the changes would in fact hit the private sector in April 2020.
What will change?
HMRC is moving the responsibility of deciding if a contractor is actually just an off-payroll employee from the contractor to the company they contract for. This puts considerable pressure on companies that use contractors because making the wrong decision would leave them liable for all the income tax, the employee’s NI, the employer’s NI and interest on all of the money they paid to the contractor.
It’s been almost 2 years since this legislation was introduced into the public sector and the effects have been substantial. There were 4 main outcomes:
- The public sector body saw no way of analysing the working practices of every contractor they work with so they assumed everyone was within IR35 to ensure they weren’t hit with the tax at a later date;
- The public sector body told all of their contractors that they needed to work through an umbrella company;
- Public sector contractors decided that there was too much hassle involved and simply retired or took PAYE jobs;
- The public sector body did a good job of analysing the working practices of the contractor and agreed that they were outside of IR35 and they continued to work together with nothing changing.
The final scenario is obviously the ideal outcome but it was a much rarer occurrence than we would have liked. We assume that private sector businesses that have more resources will be able to achieve this end with a much higher frequency but we will still see plenty of the other outcomes after April 2020.
What is the effect of being deemed ‘within IR35’?
If, in 18 months your client decides you’re an ‘off payroll employee’ you will effectively be taxed as an employee but you won’t get any of the benefits of an employee. This means that if you’re billing £2k + VAT for a week of work, instead of receiving £2,400 you would now have PAYE tax, employees NI and employers NI deducted from the £2k by your client. Luckily your accountant should be able to tell you how to get that income out of the company without paying any corporation tax or further personal tax but you’re still likely to take home significantly less pay.
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, car park 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 with the upcoming changes to the private sector, bolstering your IR35 defences is 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 Qdos to offer contract reviews and expert advice on how to improve your contract. 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 from Qdos 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.