Impact of the New IR35 Off-payroll Working Rules on Contractors
Contractors who work for only one client need to take urgent note, if they have not done so already, of the new changes to the off-payroll working rules (often known as the IR35 rules) as these are likely to have a significant impact on their tax situation.
If you’re contracting to a medium or large private sector company, your client will now determine your IR35 status. Although the company is required to take reasonable care when making this assessment, based on what happened with the public sector rollout and previous experience with private sector clients, it’s likely to have a negative impact for some contractors.
Many companies will either opt out of using contractors entirely, or will make blanket ‘deemed employee’ determinations for entire groups of contractors. So, if you fall within IR35 then your income and personal tax position may be adversely affected.
What are the main changes to IR35?
The IR35/off-payroll working rules will change from 6 April 2021.
From that date, where the end client is a medium or large private sector company, the client’s company will determine whether you should be classified as ‘employed’ or ‘self-employed’ for tax purposes. (Note: this has been the case with public sector clients from April 2017).
Where the client is a small private company, the contractor (i.e. you) will continue to make the determination.
So, why is this important for contractors?:
Although the rules governing your employment status haven’t changed, the likelihood of being classed as employed (and within IR35) will rise.
When you make the decision yourself, you’re far more likely to class your status as ‘self-employed’, rather than ‘employed’.
If the client is making this decision, there’s a high chance they’ll define you as being ‘employed’ – with all the associated tax and National Insurance Contributions (NIC) consequences this will entail.
Is my client a medium/large company?
If you’re currently contracting with a medium/large company, or plan to do so in the near future, then you’re obviously going to need to factor in the new IR35 changes. But how do you know if your client is classed as a medium or large company?
A medium/large company meets two or more of these conditions:
Turnover > £10.2 million
More than 50 employees
Balance sheet total > £5.1 million
If your client (or clients) meet these conditions, you’ll need to liaise with the client’s company to find out how they plan to classify your employment status.
Why do we need the IR35 rules
The Intermediaries Legislation (aka IR35) has been in place since 2000. It aims to remove the tax advantages of individuals who provide their services via a limited company but are in reality ‘disguised employees' – in other words, people who are claiming to be self-employed but who are actually acting more like employees.
There are obvious advantages of being a disguised employee. More of your expenses are tax deductible and your personal income can be a more tax-effective mix of salary and dividends. As such, being classed as ‘self-employed’ will have some serious benefits.
To achieve this, however, you need to be deemed ‘outside IR35’:
If you’re deemed to be an employee, you’re ‘within IR35’
If you’re deemed to be self-employed, or an independent contractor, you’re classed as ‘outside IR35’.
How does off-payroll working generally work
If you’re new to contracting, it’s worth understanding how the off-payroll working process happens, and what will be expected of you and your client.
As a contractor, you will generally operate through a limited company which you control. Your medium/large private sector clients will then assume responsibility for making the IR35 determination and will notify you by issuing a Status Determination Statement.
Under the off-payroll rules, if the end-client deems you to be an employee, the fee-payer in the contractual chain (usually either a recruitment agency, or the end client) is responsible for deducting income tax and NIC from your fee. They’ll obtain a tax code, and will calculate PAYE and NIC on the fees paid, and deduct those from the fees charged before making payment.
If you don’t agree with the assessment, the client is obliged to review it and provide a reasoned response within 45 days. However, this obviously isn’t an independent review.
It’s possible to challenge an ‘inside IR35’ determination by using HMRC’s CEST tool. But the tool is generally considered flawed as it ignores mutuality of obligation, can’t make a determination in 15% of cases, and over-simplifies the complex legislation.
Where your end client is a small private sector company, the existing rules continue to apply and you, are responsible for making the determination.
If you decide that the contract falls within IR35, at the end of each tax year you will need to calculate and pay over to HMRC any tax and NICs due on any deemed employment pay you’ve received.
Talk to us about your IR35 status
Your IR35 status can have a meaningful impact on your income and tax affairs, so it’s important to know your employment status and to plan your finances accordingly.
If you disagree with how a client deems your working status, we can help you prepare an objection to this status determination. We can also help you to calculate any deemed employment pay and get your contractor finances in order.
You can check if the new rules will affect you by following this flowchart.