New rules affecting all contractors working for medium or large-sized firms are likely to come into force from April 2020.
The changes made to IR35 that applied from April 2017 for the public sector will be extended to the private sector from April 2020. The IR35 rules are designed to remove any possible tax and national insurance advantage from the use of personal service companies and partnerships.
The changes will see responsibility for operating the off-payroll rules shift from the individual contractor to the engager. Unlike the changes to the public sector, the rules will apply to new engagements and will not be applied retrospectively.
Only medium and large sized private sector organisations will be subject to this change. If the engager is a small company, the arrangement is unaffected by these changes and compliance with IR35 will remain the contractor’s responsibility. For these purposes, a small company is regarded as meeting two of the three criteria: less than £10.2m turnover; a balance sheet of less than £5.1m or under 50 employees. For non-corporates firms, the rules will be based on turnover alone (£10.2 million).
What will happen under the private sector changes?
Status Determination Statement
The engager must provide the worker with their decision about the worker’s status, a so-called Status Determination Statement (SDS). Until this has happened, the liability for tax and National Insurance rests with the engager. Please note, the position is more complicated than this if there are multiple parties (such as agencies) involved in the supply chain.
You can disagree with an SDS. The engager has 45 days to respond to you and will either uphold its original response or issue a revised SDS.
If a contract is determined to be outside IR35 you may continue to remunerate yourself as you always have done. Your agency or engager will face the bill if the decision is later overturned by HMRC.
If a contract is determined to be inside IR35, your agency or engager must deduct PAYE and NI prior to paying you from April 2020. You can still operate through your own company but will be taxed as an employee. There will then be various tax credits to ensure you do not pay tax twice once the income comes into your company. However, you will not have the same employment rights as an ordinary employee.
There is little time to deal with these changes and there is concern that agencies and engagers will force contractors either inside IR35 or to work through an umbrella company.
Ultimately this could mean a lot less take-home pay for contractors. For someone with fee income of £100,000, being inside IR35 could cost them £7,000 to £8,000 in additional tax and national insurance.
What are my options if I’m inside IR35?
If you are found to be inside IR35 in the above circumstances, the main options available to you are likely to be as follows:
- Continue as a PSC under IR35. PAYE will then be applied by your engager.
- Become an employee of the engager.
There is also the option of using an umbrella company. The umbrella company would employ you under an over-arching contract of employment and you would effectively be taxed as an employee. Umbrella companies can absorb some of the administrative burden, but they are unlikely to create any savings and can cause delays in payments reaching you. If you do opt for an umbrella company, please make sure you undertake due diligence and fully understand their terms.
Working through a limited company inside IR35 may still prove to be your best option but each case is different. Please remember that IR35 is applied on a contract-by-contract basis, so you may have some contracts inside IR35 and others outside.
What can you do about the private sector changes?
Each situation is unique, but we believe there are a number of things you should do to prepare for these changes.
Talk to your engager
You should talk with your agency or engager to establish their intentions and the options available to you. In some cases, these discussions will have already started and you may have a good understanding of their plans.
Talk to other contractors
You may wish to consider talking with other contractors who are engaged by your engager. This will help you share information and may allow you the opportunity to arrive at a collective response which could bolster your position.
HMRC’s CEST tool
HMRC provides a free online tool entitled, ‘Check employment status for tax’ or CEST for short. It helps the worker, engager or agency to reach a status determination.
If the CEST tool determines your contract is outside IR35, that’s very positive. According to their website: “HMRC will stand by the result given unless a compliance check finds the information provided isn’t accurate”.
If the CEST tool determines the contract is inside IR35, do not be disheartened. Determining employment status does not have to rely solely on the results generated by the tool.
Ultimately, it will be your engager that makes any determination decision. They may not interpret the facts the same way you do and may consider more than CEST when making their decision. CEST is a voluntary tool which has come under significant criticism for perceived shortcomings.
If your agency or engager takes a sensible approach to the rules and you are genuinely trading outside IR35, you should be able to continue to operate as you always have done. If you have been approached by your agency or engager for an opinion on whether the rules should apply to your company, we can put you in touch with service providers who will be able to give an expert opinion on your circumstances.
Remember, the determining factors around IR35 have not been changed so anyone operating outside IR35 should, in theory, be able to continue to do so. However, these changes are forcing engagers to review their position and although the legislation forbids it, some engagers may take a blanket approach so it’s important you are clear on your position ahead of April 2020.
The new rules apply to payments made after April 2020, so will include any prior work delivered but not paid. You may therefore want to take steps to ensure that your invoices are raised in good time, so that payments are received ahead of 5th April 2020. We would advise you to urgently discuss this with your engager and seek assurances that relevant payments will be paid before the new rules take effect.
If it is determined that you are within IR35, you may wish to review your pay arrangements with the end user, to compensate you for the additional tax and National Insurance you will suffer.
Are you affected by the IR35 changes?
Ultimately, it is the engager that will decide the fate of your IR35 status. However, it is important you are well informed. Take the time to familiarise yourself with the changes and understand how the implications of being in- and outside of IR35 apply to your circumstances.
If you would like to discuss this matter further, please do not hesitate to contact us on 0800 0523 555 or use our online enquiry form.
By Jo Nockels FCCA
Last updated September 2019
Disclaimer: The information provided is based on current guidance (at date of publication) from HMRC and may be subject to change. Any advice shared here is intended to inform rather than advise. Taxpayer's circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this information, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.