New rules affecting contractors working for the private sector, directly or through an agency, are due to come into force from 6th April 2020.
Due to significant criticism of the new rules, the Government recently completed a review into IR35 in the private sector, which confirms that the changes will still be introduced as planned with just a few minor changes for clarity.
We look at the options available to you and advise on what action you should take if the new rules apply to you.
What should you do?
We understand this is both a very frustrating and worrying time and the lack of clarity is causing anxiety for many contractors.
What can we do to help?
We can help you understand the impact of these changes and find a way forward.
We have included below a summary of the proposed changes and possible options that you may have been offered by your engager.
There is no generic solution to suit all circumstances and each engagement will be unique. However, we are seeing increasing numbers of engagers forcing contractors down a PAYE route where they will be engaged as an employee or as an employee via an agency or umbrella company. Where you are in this situation, we can help you choose what to do with your limited company.
1. Help to wind down your personal service company (PSC)
If you have decided to accept a PAYE engagement, whether as a direct employee or through an umbrella, we can help you decide on how to wind down your company.
In general, an informal striking off or a more formal solvent liquidation will be two of the most viable options.
We partner with expert insolvency specialists who can offer a very competitive package to assist you with this. There are a number of issues to consider when winding up a company, as well as potential tax benefits. We would be happy to help advise on the tax consequences which may arise. Please contact us today to discuss this further on 0800 0523 555 or use our online enquiry form.
2. Determination of employment status
If you are caught by these new rules and your engager has determined you as being within IR35, we can arrange for your contract to be reviewed. This may be useful should you wish to appeal against the determination. We would caution you will only have 45 days to make an appeal and the appeal will be to the same organisation which previously determined your status. Although we can help with this, we are unable to offer a service to fully handle the appeal. Please bear in mind that an appeal may not be successful in overturning the original decision.
3. Impact of engagement under PAYE
You will need to consider the rate of pay being offered, the tax consequences of the PAYE engagement and the contractual terms of the employment contract.
With umbrella companies, the umbrella will deal with administration and they can be attractive for a short-term contractor. Being an employee will lead to a similar tax outcome, but a client may benefit from greater employment rights than typically offered through an umbrella company.
From a tax perspective, PAYE engagements will generally remain a significantly less tax-efficient option when compared to a limited company outside of IR35.
If you have been informed of new payment terms, we can run a calculation to show you the impact of a PAYE engagement. To keep things simple, we’d propose running a calculation to show the impact in the 2019/20 tax year.
We have included a summary of the main points we believe are relevant below.
Summary of changes from April 2020
HMRC has launched an enquiry into the proposed reforms and there remain uncertainties as to how the rules will work. However, we have included below a high-level summary of the anticipated changes.Determining whether a contract falls within the new off-payroll rules, sometimes referred to as IR35, will shift from the contractor to the end-user of the labour, from April 2020.
The rules impact large and medium-sized engagers. For contractors working for a smaller end-user, the contractor will remain responsible for determining their own IR35 status.
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-corporate firms, the rules will be based on turnover alone (£10.2 million).
If a contract is determined to be outside IR35 you may continue to remunerate yourself as you always have done. Your agency or private sector client will face the bill if the decision is later overturned by HMRC.
If a contract is determined to be within IR35, your agency or private sector client must deduct PAYE prior to paying you. You will 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.
There is evidence that an increasing number of engagers will force contractors to work through an umbrella company or become an employee. Ultimately this could mean a lot less take-home pay for contractors.
The engager must provide the worker with their decision about the worker’s status, a so-called Status Determination Statement (SDS).
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.
Possible options you may be offered
1. Continue as a PSC outside IR35
Here we assume that your engager determines the IR35 rules do not apply in your case. We believe this will generally be the most tax-efficient outcome and you may continue to use your PSC and will remain responsible for determining your IR35 status.
2. Continue as before inside the IR35 rules
Here, PAYE will be deducted before your invoiced work is paid to you. This will generally mean you are in a worse tax position. You will be informed of the engager’s decision with the SDS.
Your engager may require you to use an umbrella company
In this scenario, PAYE will be applied, and the umbrella company will employ you under an over-arching contract of employment. They will then engage with the recruiter or end client under a business to business contract.
3. Become an employee of the engager
Here you will be engaged directly by the end-user of your labour. This will mean PAYE will be applied and you will gain employment rights.
Changes to payment for services
On 7th February, in a last-minute change to prior advice, HMRC and the Treasury announced that the rules will now only apply to payments made for services provided on or after 6th April 2020.
Previously, the rules would have applied to any payments made on or after 6th April 2020, regardless of when the services were carried out. It means organisations will only need to determine whether the rules apply for contracts they plan to continue beyond 6th April 2020. As this is a last-minute relaxation of the rules, we’d advise you to urgently discuss this with your engager to make sure you are clear on the treatment on your payments.