IR35 is an important – and controversial – legislation, and its rollout to the public sector is happening in April 2020, despite calls for the government to reconsider this decision. Due to many self-employed individuals not being prepared for this change and not knowing what it entails, Gorilla Accounting is taking a look at the upcoming updates to IR35 and how it will affect contractors.
As contractor accountants used to dealing with this ‘intermediaries’ legislation, we know it’s crucial that self-employed individuals prepare for it the best way they can – and are aware of what happens if they’re caught within it.
A Brief Overview of IR35
We’ve talked about this controversial legislation several times, so we’re taking a brief look into what IR35 actually is.
IR35 was introduced back in April 2000 to address issues related to people who use an intermediary, like a limited company, to supply their services, instead of doing it as an employee. This means the individual avoids paying employee income tax and national insurance contributions. In short, IR35 is a legislation meant to prevent people from disguising themselves as freelance contractors in a bid to pay less tax.
There are several factors that support the fact that you’re an employee, not a contractor, such as regular fixed payments, lack of financial risk on your part, lack of control and an inability to work for other clients, just to mention a few.
If you’re found to be within IR35, you have to pay this tax and contributions. According to HMRC, many people are not classifying themselves properly, which is leading to economic losses of around £1.2 billion a year.
To learn more about IR35, talk to us and our specialist adviser will help you with any queries you may have. You can also find more information on our “What is IR35?” page.
IR35 in the Private Sector
The government believes that it is unfair that employees pay more tax than contractors, so they implemented IR35 changes in the public sector back in 2017 – now, after 6 April 2020, the government is rolling it to the private sector. This was announced by the Chancellor in the 2018 Autumn Budget.
The IR35 in the private sector was delayed until 2020 and will apply to contracts where the end client is a medium or large business. According to the Companies House Act 2006, c.46, part 15, a ‘medium or large business’ is defined as:
(3) The qualifying conditions are met by a company in a year in which it satisfies two or more of the following requirements–
1) Turnover (not more than £10.2m)
2) balance Sheet Total (not more than £5.1m)
3) Number of Employees (not more than 50s)”
Small companies will be exempt from the private sector extension. But how can you tell whether you own a small, medium or large company? If, during a period of 12 months, your business’ turnover is less than £10.2 million, your balance sheet total is not more than 5.1 million and you employ less than 50 employees, you are considered a small company.
The update also means that the onus for determining IR35 status will fall with the end client or agency. Therefore, you will not be the only one responsible for figuring out the right tax and national insurance contributions you have to make. The reform is likely to impact the majority of contractors in the private sector and is estimated to add £1.3 billion per year to the Treasury from 2023.
What Are the Changes?
What exactly will change once April 2020 comes around?
The public sector reform was introduced in April 2017 and made the hiring client responsible for determining the tax status of the contractors they use – from April 2020, this will apply to medium and large businesses in the private sector as well.
From April 2020, employers will have to assess contractors to figure out whether or not they’re compliant with IR35 rules. A company has to determine whether or not their contractors are inside IR35 or not – if they are, the employer has to deduct the relevant national insurance and tax.
So, even though HMRC have introduced and implemented several IR35 amendments, they still believe many contractors are not paying the correct amount of tax and national insurance contributions, which is what this rollout boils down to.
Due to concerns surrounding this IR35 reform, HMRC have made some changes ahead of the implementation date. Before, the new rules would have applied to payments made on or after 6 April 2020 no matter when services were provided; now, according to the government, they will only apply for payments made for services carried out on or after 6 April 2020.
How Will It Work?
In essence, your client will assess your status before you start your contract; while there will likely not be a clear definition of whether or not a contract is within IR35, many clients will use the CEST tool to reach a result. They will then have to give you a status determination statement, which will tell you whether IR35 will apply to your case – if they don’t provide this statement, they are not meeting their new obligations.
If you’re inside IR35, the fee-payer, such as the recruitment agency, will have to deduct the right amount of tax and national insurance contributions. Recruiters may prefer that you operate through an umbrella company instead, so that they won’t have to make these deductions.
As mentioned, there’s a risk that contractors who are, technically, outside IR35, will be considered (by employers) to be inside IR35 as a precaution. After all, companies will be liable if the wrong IR35 status is determined, so many are making a decision to employ individuals on a PAYE basis.
The amendment is welcome but considered a small comfort, especially considering companies are already firing contractors due to what IR35 non-compliance could mean for them. While the government has launched a review of this reform, which is set to be concluded at the end of February, there are no plans to halt its implementation. Many had hoped the new IR35 rules would be deferred by, at least, a year, but it doesn’t appear to be the case.
The House of Lords’ finance bill sub-committee is also doing a separate inquiry into the new IR35 rules, which will look into how the reform will impact organisations and how workers’ tax status will be determined. This analysis will also include how effective CEST is and how it could be improved, as well as whether the impact of the new rules has been fully assessed and understood.
There is no doubt that contractors embrace this inquiry – however, considering the IR35 reform will come into effect on 6 April 2020, many also believe it should have been done a long time ago.
What Are the Concerns?
Because responsibility for the employment status determination will rest with end-user client, some people worry that private sector businesses will take a cautious approach and offer only PAYE roles.
There is also the danger that many organisations in the private sector that employ contractors are unaware of the new IR35 update, and less than 50% of medium and large companies have started to prepare for what’s coming. Many potential employers are also concerned that they are going to miss out on skilled self-employed individuals due to these IR35 changes.
It goes without saying, then, that employers should seek professional help and advice to guarantee their contractors are not caught within this legislation. Make sure to assess any potential self-employed individuals before you hire them as well.
We provide accounting for contractors here at Gorilla, so you can have the peace of mind of knowing that you’re compliant with the latest IR35 updates.
Working Through Your Limited Company When Inside IR35
So many contractors opt to form their own limited company, which is not surprising, considering the tax benefits this structure offers. However, if you’re caught inside IR35, you may want to consider whether working through a limited company is efficient.
Unless you negotiate higher rates, you will take home less pay if you’re found to be inside IR35. However, there are several reasons why you may want to keep this operating structure, even if you’re caught within this legislation.
One of the most important aspects is that you have limited liability, meaning your personal assets are not affected if anything goes wrong. In addition, you retain control of your business and can accept contracts that are both inside and outside IR35; you also keep the ability to set your own rates and terms.
Plus, if your end client is deemed to be a small business, you will still be responsible for determining your own IR35 status. You may also have better opportunities for future pension planning, and you will be able to claim certain business expenses as well.
Owning a limited company offers a wealth of benefits, so it’s crucial that you explore all avenues before making the decision to close it because of new IR35 rules.
How Can You Prepare for the Update?
Companies need to be aware of their new responsibilities if they plan on hiring contractors after 6 April 2020, so they should prepare ahead of time. This includes ensuring everyone in the company understands IR35 and its consequences (especially HR and recruiters) and executing an approach for the assessment of potential workers, mainly their employment status.
It also means having contingency plans – a key component of IR35 – in place if workers don’t want to switch to PAYE and implementing processes like substitution into your operations.
As a contractor, there are also a few things you can do.
Whilst you won’t have control over the IR35 status determination process, you can take ‘substitution’ into account. The right to provide a substitute is often a key component in IR35 investigations and, while it’s not the only determining factor, it can go a long way into helping you to be found outside IR35.
The same is true for ‘control’ and ‘mutuality of obligation’. These factors will help to show that you’re not under the direct control of the end client and that you’re not obligated to accept work if you don’t want to.
Many contractors are also considering closing down their limited company and going on payroll once more. Before making key decisions such as this, it’s imperative that you get independent advice. Having your contract reviewed by an IR35 expert can put your mind at ease and give you knowledge of where you stand.
Contact Gorilla Accounting for your IR35 Needs
From 6 April 2020, it will be more important than ever to make informed decisions. Talk to a specialist accountant that can help you to assess your options and will offer you a deeper understanding of the impending changes.
To learn more about the 2020 IR35 reform, you can easily get in touch with Larsen Howie, Gorilla Accounting’s specialist IR35 Contract Review provider for contractors, freelancers and consultants.
Because we’re limited company accountants, we stay on top of any legislation that will not only impact self-employed individuals, but that will also affect contractors who own their own company. So, if you have any questions about any of our services, please don’t hesitate to ring us on 0330 024 0406 or emailus on firstname.lastname@example.org.
In the meantime, you can check out our contractor tax calculator, designed to help you figure out your take-home pay.