IR35 - How the upcoming changes will affect you and your business
What is IR35?
IR35 is HMRC’s Off-payroll working rules, it applies to individuals that are providing services via an intermediary. In most cases, it is an individual that is providing services through their own Limited Company. However, partnerships, managed service companies and sole traders can be caught up in the tax law.
As a brief summary, if the worker would be classed as an employee if they were contracted directly by the company that they work for, then tax and national insurance contributions must be deducted from payments made to the worker.
IR35 has been a grey area since the rules were first introduced on 6th April 2000, as the legislation is not straight forward nor easy to interpret. Whilst there have been several successful cases against HMRC, it is still an area that both companies and contractors struggle to get right.
What are the changes to IR35 that come into effect from 6th April 2020?
There are no actual changes to the IR35 legislation with regards to employment status or if a contract falls under the off-payroll working rules. What is changing is where previously it has been the responsibility of the worker or intermediary to determine their status, the responsibility is shifting to the company to which the worker is contracting (except for small-sized companies).
How will this affect most contractors?
It will depend on the final company that you are contracted to, feedback so far has been inconsistent. Some companies have taken a risk-averse blanket approach and insisted that all contractors fall under IR35. Some have looked at individual contracts and decided that the contract does not fall under IR35, but then have required the worker to provide a tax guarantee that if IR35 tax is due then the worker will be liable.
The changes came into effect from 6th April 2017 in the public sector, and again there has been no consistency since they were implemented, councils have even deducted tax from tradesmen that would clearly not be under IR35.
Companies just don’t want the risk of the potential tax, interest and penalties should HMRC inspect and they are found to have not complied with the regulations, and as the regulations are so grey, they are erring on the side of caution. What is the impact if the company I contract to inform me that my contract falls under IR35 and they are going to start deducting tax and NI?
You will receive a status determination from the end company that you contract for, notifying you that you fall under the off-payroll working rules.
When payment is made from the company tax and national insurance will be deducted from the invoiced amount excluding VAT, less any direct expenses that would have been met had you been employed. This will then be reported to HMRC under your national insurance number.
When the money is then paid into your company bank account this can then be paid as a salary via payroll but with no tax or national insurance deducted to avoid any double taxation. If you don’t agree with the determination then you can challenge it in writing, you will need to provide the reasons for disagreeing and provide any evidence that you may have. The company has 45 days to respond and will still deduct tax and national insurance while this is being dealt with. Can I still claim the same expenses if I fall under IR35?
Under the off-payroll working rules expenses are restricted to 5% of your income, so if your income was £100,000 then allowable expenses would be restricted to £5,000. This includes all costs and not just reimbursed expenses such as travel.
Do the regulations affect Freelancers?
If you are genuinely self employed offering a service to a number of companies, such as a social media agency, where you provide your own tools and equipment, have a number of clients that you work with, set your own hours then you should not fall under the IR35 regulations.
On the flip side if you were a ‘freelancer’ that only worked for one company, using their tools, equipment, software licences, worked for that company 9-5, then you could fall under the IR35 regulations. What do I need to be doing in preparation for April?
Firstly, contact the agency that you are working through to get your status determination to enable you to assess the impact that this will have on you from 6th April 2020.
If the determination comes back that you do fall under IR35, discuss with the agency the likelihood of being able to challenge it, if you have had contracts professionally reviewed and have concluded that the contract is outside the scope of IR35 then you will have a case to challenge.
If you have not got a case to challenge your status then, unfortunately, it is a case of understanding the financial impact the changes will have on you, in some cases, it may even be worthwhile to go on the payroll to get the benefit of paid holiday, pension contributions etc.
If in doubt speak to your accountant.