Private Sector IR35 Reform – What Contractors Need to Know

IR35

IR35 has been a fact of life for UK contractors for some time now, and if you’re contracting through your own limited company, it’s something that you need to know about. In this article, we’ll explain what it is, how it affects contractors like you, what the up-coming changes are all about and what you can do to protect yourself and your income.

A Contractor's Guide to IR35: click here to download>>

What is IR35?

IR35, also known as the intermediaries legislation, is designed to prevent tax avoidance by so called “disguised employees” working through intermediaries, like Limited companies.

Whether you’re caught by, or “inside” IR35 on a particular contract, depends on whether your relationship with your end client is one of “disguised employment” or whether you’re providing services as an independent contractor.

If you’re deemed to be employed for tax purposes the legislation ensures that you pay roughly the same tax and NI as an employee would. 

What difference does IR35 make?

IR35 affects how the money you take out of your Limited company is taxed, and it can have a marked effect on your take-home pay.

If you’re outside the scope of IR35, trading through your own limited company can be extremely tax efficient, particularly if you have a good specialist contractor accountant to guide you. You can claim travel and subsistence expenses, and most importantly you can take money from your company as a combination of salary and dividends, which allows you to legitimately minimise your tax liability.

If you’re inside IR35, aside from an allowance of 5% of turnover on Private-sector contracts, all payments are deemed as salary, and travel and subsistence expenses are not allowed. This means working inside IR35 can have a significant impact on your net income.

Public-sector contracts

If your end client is classed as a Public-sector body, they are now responsible for assessing the IR35 status of any contractors they engage. This means that if you work in the Public sector, the assessment of your IR35 status has been taken out of your hands.

In addition, the 5% of turnover allowance is not allowed on Public-sector contracts, and if your client decides that you’re inside IR35, PAYE tax and NICs must be deducted from your contract rate before payment is made to your limited company. This responsibility falls on the “fee payer” which is whoever pays your limited company, usually either the end client or a recruitment agency.

Since it was implemented in 2017, the Public-sector reform has been widely criticised, and if you’ve been contracting for a while you may have heard about, or even experienced, some of the issues.

The main problem is that some Public-sector bodies have been unable or unwilling to assess IR35 status correctly, and have instead employed blanket or “role-based” decisions, despite the legislation’s requirement for “reasonable care”.

In many cases, this has led to a “false employment” situation, where some contractors are paying PAYE tax and NICs when they shouldn’t. It also has the effect of unnecessarily increasing the cost of hiring contractors at the same time as decreasing contractor take-home pay, which has reportedly caused staffing difficulties across the Public-sector.

Meanwhile, in the Private-sector

At the moment, if your end client is a Private-sector organisation, you are responsible for determining your own IR35 status. Whatever your status is, your end client pays your limited company’s invoices gross, and they have no involvement in your tax affairs. It’s up to you to account correctly for tax and NI, and you are liable if you get it wrong.

HMRC believes that many Private-sector contractors are getting it wrong, and they have been pushing hard to extend the Public-sector rules into the Private-sector. Unless something unexpected happens, Private-sector reform will go ahead in April 2020. At the time of writing the second consultation is still underway and any detail could be subject to change, but from the information we have right now, this will mean:

  • Medium and large Private-sector companies will be responsible for determining the IR35 status of any contractors they engage.
  • Where the engager determines a contractor is inside IR35, the “fee payer” (whoever pays the contractor’s limited company) will have to deduct PAYE tax and NICs
  • The 5% of turnover allowance will no longer be allowed
  • There will be no change to IR35 itself; if you’re genuinely outside IR35 now, you should still be outside after the reform. The difference is that your client will be responsible for assessing your status.

The Private and Public sectors are very different, they’re affected by different forces, and having been through similar events before, the contracting industry is better prepared that it was in 2017. Even so, it’s possible that we’ll see some of the same consequences when and if Private-sector reform is implemented, and if we do, they’re likely to be on a much larger scale, affecting many more contractors. This prospect is causing widespread anxiety among contractors, recruiters and end clients.

As in the Public-sector, the main danger for a contractor is that you’ll be assessed as being inside IR35 when you’re not, but there are some things you can do to make that less likely.

How you can protect yourself

Make sure your status is correct now

Before we worry about someone else getting your status wrong, it’s important to understand what it really is. Assessing IR35 can be complex, and we strongly recommend getting a professional review from an IR35 specialist. A specialist will give you a detailed report, so you understand why they’ve come to their conclusions. They should also be able to advise you in ways you can strengthen, or possibly even change your position.

Once you understand your position it will be a lot easier to have the necessary discussions with your client.

If you’re clearly inside IR35

If your chosen specialist advises that you’re inside IR35, it’s important that you act on this information and account for your tax and NI correctly. If it’s a “borderline” decision and there’s something you can do about it they’ll advise you what action to take, but there could be nothing you can do.  

If all of your contracts are likely to be inside, you might wonder if trading through a limited company is right for you. There are advantages to trading through a limited company even if you’re inside IR35, so we’d advise you to discuss your position in detail with a specialist contractor accountant before making any decisions.   

If you’re outside IR35

If your assessment confirms that you’re outside IR35, that doesn’t mean your work is done. It’s important to gather evidence to support your status at every opportunity. See our Guide to Demonstrating You’re Outside IR35 for in-depth advice on how to support, strengthen and maintain your outside status.

 Talk to your client

After the Private-sector reform, your client will be responsible for determining your IR35 status, just like Public-sector bodies are now, and the best strategy is to help them make the right decision. If your current contract will still be running after 5th April 2020, it’s even more important to talk to your client about their intentions.

Your independent assessment and the evidence you’ve gathered could go a long way to helping your client understand your status, and make it less likely they’ll incorrectly assess you as inside IR35. Remember, it’s very much in your clients interests to assess your status correctly, so open lines of communication are key.

If you have any questions, or if we can help in any way, please contact our expert team on 01296 468 483 or email info@orangegenie.com.

 

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