IR35: does it affect you?

UPDATE: Note that, whilst the information in this blog remains relevant, the Government has since announced that the changes will be delayed by one year, instead coming in to effect on 6 April 2021.

If you work in the private sector, you will doubtless be aware that the ‘off-payroll’ rules are changing with effect from April 2020.

IR35 has been around since 2000, with its core aim being to remove the tax advantages of providing services via a Limited Company by an individual who are not truly in business on their own account. In laymen terms, the rules target ‘disguised employees’: those whose working practices are, in reality, more akin to those of traditional employees.

To date, under IR35, the contractor’s Limited Company has been responsible for determining the status of its workers.

Due to perceived widespread non-compliance with IR35, in 2017 the Government rolled out ‘off-payroll working’ rules to cover all public sector organisations. Under said rules, the end-client is responsible for determining the employment status of its contractors. This change has had a significant impact on persons within the medical profession, for example.

At the 2018 Budget, the Chancellor announced that the rules were to be extended to most private businesses from April 2020. It is forecast that this new measure will net up to £1.3bn by 2023.

A key point, here, is that the rule change only affects Medium and Large sized businesses, with Small businesses being exempt. For guidance, a company is deemed as small if it meets two or more of the following criteria:

• Annual turnover is less than £10.2m

• Balance sheet total is less than £5.1m

• Number of employees is less than 50

So, if the end-client (the entity that is paying you) is a Small business, there is no change and life carries on as normal.

What about if the end-client is a Medium or Large business?

We have found that there has been understood confusion as to whether clients fall in or outside of the IR35 legislation. To help determine the status, the end-client must issue a Status Determination Statement (SDS). The SDS outlines the end-client’s IR35 status decision and must be provided to both the contractor and the party directly engaging the the contractor. Until this is provided, the end-client will remain responsible for collecting Income Tax and National Insurance.

The client is obliged to take reasonable care when making this assessment.

There is an official online status tool also - CEST. HMRC has stated that if the tool finds you are ‘outside IR35’, it will stick by this determination, assuming you have provided accurate information.

What happens if you are ‘inside IR35’?

If this is the case, the ‘fee-payer’ (the party closest to your Limited Company in the chain) is responsible for paying employers’ NICs, and deducting employees’ NICs and Income Tax from your invoice for your services provided, and paying these liabilities over to HMRC.

Note that if you are VAT registered, the VAT element is excluded from the tax calculation before being added back on for the payment to your Limited Company.

What are the options if you fall ‘inside IR35’?

These are as follow:

• Trade via your Limited Company

  • If you’re not caught by IR35, you trade as usual. If you are, your ‘deemed employer’ (the ‘fee-payer’) will deduct all taxes and pay you a deemed income

• Trade via an Umbrella Company

  • A reputable PAYE company will act as the intermediary between you and the client (rather than your own Limited Company’). You will be taxed as an employee, however the employers’ NIC must be paid by the Umbrella Company, an not be deducted from your net pay. This should be accounted for in the gross contract rate you are quoted when joining and Umbrella Company

• Become a permanent employee

  • This is probably the last resort for contractors, but may be an option if you don’t have an other choice, particularly in the short term

Hopefully you have found this blog of use. We are appreciative that such changes can be concerning for those who may feel they are affected, so please do not hesitate to contact us should you feel you require any further information.