If you are self-employed as a Contractor or Freelancer, or indeed you work with the same as a recruiter/agency, then you need to be aware of the changes as they potentially affect your working practices directly. The summary below sets out how the changes may affect the private sector with regard to off-payroll working reforms.
The proposed changes, although not as draconian as expected, do mean that you need to review your working practices regularly to ensure you remain compliant. Although much of the responsibility for determining IR35 status will fall on your client, you still have a vested interest as the Contractor or Recruiter, to ensure the determination is accurate and monitored.
For those of you who are compliant and operate correctly outside of IR35 – you have nothing to worry about. The legislation is aimed at targeting those individuals who blur the lines of Self-Employment and manipulate the current system to afford themselves a more favourable tax position.
The Changes Under the New Finance Bill
From April 2020, new legislation outlined in the draft Finance Bill proposes that private sector clients will be responsible for assessing contractors’ IR35 status, shifting the responsibility from contractors as has been the case since the introduction of IR35. This measure will apply to contractors who engage with medium or large-sized organisations in the private sector, while engagements with small organisations outside the public sector will be exempt, in an attempt to reduce the administrative burden; therefore, contractors engaging with small companies will still be responsible for determining their IR35 status, as before.
HMRC defines a small company based on the guidelines set out by the Companies Act 2006, which describes three main criteria in order to qualify as a small company:
Annual turnover must not exceed £10.2 million
Assets outlined on the balance sheet must not total more than £5.1 million
No more than 50 people employed by the company
Should a company exceed the above conditions, it will then be considered either a medium or large company and will therefore be responsible for evaluating their contractors’ IR35 status. By clients we mean the end company/organisation which you/the Contractor provides their services to. The Client will be required to pass their status determination and supporting reasons for their conclusions to both the first party they contract with in the labour supply chain, and the worker.
When assessing IR35 status, the end client or agency must complete a status determination, meaning that there should be no blanket assessments placing contractors inside IR35. Any issues surrounding the determination will be addressed via a new ‘client-led status determination process’. The full details of what this process will include are yet to be published.
As a result, a contractor will be able to dispute their status by appealing directly to their client, should they feel a decision has been made incorrectly. With this in mind, it is important that contractors work with their clients to continue to ensure that their contracts accurately reflect their working practices and remain classed as outside IR35 where appropriate.
Guidance on how clients can take ‘reasonable care’ to decide their status and how the dispute process could operate will be published by HMRC.
Over the next few months HMRC will release further guidance on the new legislation and will roll out targeted communications to raise awareness.
An updated online Check Employment Status Tool (‘CEST’) will be made available before the end of the year, although it’s still unclear what changes will be made to the tool. It will be interesting to see whether the points raised following the recent success taxpayers have had in court arguing that IR35 does not apply to them are also addressed in the update.
Rules surrounding who would be considered an employee for IR35 purposes remain the same, the only difference being the party who determines this shifting from the contractor to the end client as described above. The new regulations should therefore not alter the status of a contract, providing it has been correctly identified as either inside or outside based on the existing guidelines surrounding IR35.
Non-Compliance for Medium and Large Companies
The draft legislation suggests that the liability for any unpaid PAYE and NIC transfers to the party in the supply chain closest to the client and, if necessary, ultimately to the client itself.
The draft legislation, however, does recognise that in certain situations (unclear what these are at this stage) it would be inappropriate for HMRC to pursue unpaid liabilities in this way. HMRC will indeed issue detailed guidance on this in due course and clarify further which steps clients will need to have taken to show “reasonable care”.
How Will the IR35 Update Affect Me?
The new legislation will act as an extension to existing regulations surrounding IR35 in order to increase compliance and is aimed at individuals supplying their services through an intermediary to a medium or large-sized organisation. HMRC’s view on the impact of this that “those who are complying with the existing rules should feel little impact. The measure is targeted at individuals who are not compliant with the current rules.”
So, the main effects will be felt by those who are non-compliant, meaning they will be required to pay tax at the correct levels, which could incur additional tax liabilities as a result.
The flexible workforce remains an important part of the economy and we anticipate that demand for contractors and freelancers will not be affected by the updated regulations, as the criteria surrounding IR35 itself are not changing.
Providing contractors have taken the necessary steps to ensure compliance, they will not be likely to encounter any issues as a result of the new legislation. A proactive approach is ideal in this scenario, so contractors should begin discussing the updated regulations with their clients sooner rather than later, to make sure that both parties are informed and compliant in their working practices.
What is IR35 Compliant?
The legislation is complex, so you may be asking yourself: am I IR35 compliant? And what can I do to prepare for the new April 2021 changes?
Being IR35 compliant simply means paying the right amount of tax and national insurance contributions if you’re within IR35. Because the responsibility of confirming the IR35 status will change from the employee to the agency or end client, if you’re caught by this legislation, the agency or end client will also be accountable for tax and national insurance deductions.
In short, you have to pay national insurance and PAYE on the salaries you draw throughout the year.
At the end of the tax year, it’s important to ensure that you’ve made the right deductions. This is because the salary you get after these deductions is called a ‘deemed payment’ and it’s how you’ll receive most of your income if you’re inside IR35.
Many people are worrying about how to be IR35 compliant, so you’re not alone. The good news is that it’s not your company that can be within IR35, but the contracts you take on, so even if some are inside IR35, some possibly won’t. This is also why it’s usually still tax-efficient to operate through a limited company (we can also help you set up a limited company, so speak to us to see how it can benefit you).
Companies must be aware of their new responsibilities and must understand what IR35-compliant contracts mean. The same is true of consequences, so that they can correctly determine the status of potential employees.
As for contractors, you can take steps to help make sure you’re IR35 compliant by taking the HMRC IR35 test, which will allow you to assess your current business practices. You can also provide a substitute if necessary, as this is a crucial element in HMRC investigations and can help you being found outside IR35.
There are many other ways to remain compliant, so don’t hesitate to talk to a specialist who can advise you further. Due to the complicated nature of this legislation, it’s better to be safe than sorry.
HMRC Loses IR35 Cases
It’s also important to remember that HMRC is not all-powerful and have, in fact, lost a significant number of IR35, some of them high-profile.
The latest is Helen Fospero, who avoided paying £80,000 in income tax and national insurance contributions after being able to prove that she was outside IR35. While HMRC argued that the ITV presenter was an ITV employee and owed back-taxes for the 2013-13 and 2013-14 tax years, Fospero was considered self-employed by a First Tier Tribunal judge.
Other cases include Paul Hawksbee, who was considered to be inside IR35 by HMRC but appealed this decision and ended up avoiding a tax bill of £140,000, and Kaye Adams, who managed to avoid a PAYE tax bill of £81,000 and a further £43,000 in national insurance contributions.
Lorraine Kelly was another famous figure who fought back against an HRMC tax bill of £1.2 million.
If you’d like to read more about IR35 losses, we have written a comprehensive article titled ‘HMRC Lose More IR35 Cases‘.
The changes are not as bad as everyone expected. For those that are genuinely self-employed and operate outside of IR35, there should be nothing to worry about. It is, however, crucial that you as a Contractor, or a Recruiter, ensure you align yourself with a specialist advisor in this area.
Our IR35 expert partners, Kingsbridge Contractor Insurance, can provide the professional advice you need to make sure you’re on the right track, so get in touch with us on 0330 024 0406 to learn more or send us an online enquiry.
How Can Gorilla Help?
Our advice surrounding IR35 and being IR35 compliant remains the same. We are specialist Accountants/Advisors to the self-employed and we live and breathe IR35 every single day.
Our advice is simple – have your contracts properly reviewed. We have specialist advisors connected to Gorilla who can quickly look at your papers and give you an accurate determination as to your current IR35 status. The consequences of not getting specialist advice or indeed operating in a non-compliant way could be devastating for you and your company.
At Gorilla Accounting, we specialise in providing a service for freelancers, locums and contractors and we will continue to support our customers by providing tailored tax and accounting advice throughout these changes, to ensure our clients stay informed and have the necessary tools at hand to maximise their finances.
Ultimately, we expect contractors who are fully compliant will notice little change once the bill is in effect and we will continue to offer advice and guidance to our contractor clients.
If you are affected by the above, then get in touch with us as soon as possible.
If you would like to read further on the subject, then here is a useful link to the draft legislation.