IR35 TAX REFORM IN THE PRIVATE SECTOR - CONTRACTORS

Contractor Guide

Over the past years, the Government has argued that in many cases, contractors are paying less tax than employees and that this is unfair. Subsequently they announced in March 2019 their intention to tighten the rules surrounding the employment status and the subsequent tax class of contractors. Therefore as it stands today, further changes to Inland Revenue 35 (IR35) will be coming into force from April 2020.

IR35 rules have been in place since 2000, but the government believes that non-compliance is widespread.

HMRC believes it is fair that two individuals working in the same way pay broadly the same income tax and national insurance contributions (NICs), even if one of them works through a company. IR35 was introduced in 2000 and requires that individuals, who work like employees but through their own company, pay similar taxes to other employees.

HMRC goes on to state that those who do not comply with the rules pay significantly less income tax and NICs than an equivalent employee and the cost of non-compliance to the Exchequer will reach £1.3 billion a year by 2023-24, depriving public services of vital funds.

The aim of this communication is to bring you up to speed with these recent legislative developments from April 2020 and give you time to prepare for any potential changes.

Shorterm has spoken to a number of contractors and as a result, we have devised a set of questions that are aimed at providing you with information about the reforms from April 2020 so that you can seek advice and prepare for these changes. Further communications will follow from October of this year and again in 2020.

If you are a Shorterm Group contractor and you have specific questions or queries please email our dedicated enquiry channel at questionIR35@shortermgroup.com and we will promptly respond to your query.


What is IR35?

IR35 is tax legislation that was introduced in 1999 and is designed to combat tax avoidance by worker’s supplying their services to clients via an intermediary, such as a limited company or a payroll provider. Such workers are called ‘disguised employees’ by Her Majesty’s Revenue and Customs (HMRC). If contractors are found to be captured by IR35, they will have to have income tax and national insurance contributions (NICs) deducted at source as if they were employed.

What is changing?

For contractors in the private sector, it is the directors of Limited companies and their advisors who perform the IR35 assessment and determine their employment status to conclude if their role falls inside or outside the scope of IR35. From April 2020, the incoming legislation will put the responsibility for determining this status on the end client rather than on the contractor or the agency.

How will my status be determined?

HMRC developed the Check Employment Status for Tax (CEST) service, to help individuals and organisations decide employment status. HMRC is looking to enhance CEST to ensure it works effectively for organisations affected by the IR35 reform. Here is a link to help you to understand more about CEST:

Click here to access HMRC's Check Employment Status for Tax (CEST) service

Here is an extract from HMRC’s website to help you to understand how a client will determine your status:

 

Employed or self-employed? Whether a worker is employed or self-employed for income tax purposes depends upon the facts of each engagement:

Alan would be considered as self-employed for this contract. Jemima would be considered as an employee for this contract.
Alan is taken on by a manufacturing firm to design and build a new website for them. Alan and the firm have agreed a price for the job and when he will deliver the new website. Alan will mainly work at home, using his own equipment to complete the task. Alan is free to work for other clients but faces a contractual penalty if he doesn’t deliver the website on time, to the agreed standard. This represents a significant financial risk to Alan if he fails to deliver the final product, as agreed.

The manufacturing firm need someone to maintain and update the new website. They hire Jemima to work for three days’ a week, eight hours each day. The firm provides Jemima with a laptop so she can work at their offices, or at home with their permission. She reports to the head of the firm’s IT department, and must follow their style guide and format to update the website. The firm is responsible for providing and updating the software Jemima needs to do her work. If

Jemima has to work longer than her contracted hours, she will be paid overtime. Jemima will be able to work elsewhere on the days she is not working at the firm, with their agreement.

 

What could change?

If a contractor is deemed to be inside IR35, then the legislation will state that their tax and national insurance must be stopped at source in the same way as an employee therefore we will have to administrate these deductions and pay it to HMRC on the contractor’s behalf. If the contractor is deemed to be outside of IR35 then nothing will change.

What if I don’t agree with the determination made by the client?

The Government plans to introduce a statutory, client-led status disagreement process to allow individuals and fee-payers to challenge the organisation’s determinations.

If I am caught by IR35, does this mean I am classed as an employee?

Yes but only for tax purposes. You are still a contractor but will have to pay your tax and employees national insurance in the same way as that of an employee of the client which will be deducted at source.

Is this reform retrospective?

HMRC says the reform is not retrospective. As was the case in the public sector, HMRC will focus on ensuring businesses comply with the reform from April 2020, rather than focusing on historic years. HMRC will not carry out targeted campaigns into previous years when individuals start paying employment taxes under IR35 for the first time. Organisations’ decisions about whether workers are within the rules will not automatically trigger an enquiry into earlier years.

Do I have to stop working through my company?

No. The reform will not stop anyone working through a limited company if that suits them.

Where can I get more information on this?

In order to help you prepare for change, we have included the links below:

Click here to access HM Treasury's IR35 fact sheet

Click here to access Off payroll working rules, Consultation and Responses

Click here to access HMRC's CEST determination tool

How long has this been planned?

The government entered into a consultation period in March 2019 and on the 11th July 2019, published its summary of responses. Here is a timeline of past / future events so far:

IR35 Timeline

What should I do next?

As a director of your own company, we assume that you have your own advisors therefore please seek their counsel and liaise with them to prepare for the changes.

Is it likely that the legislation will change?

It is unlikely that there will be change. The legislation is currently in draft form and will be confirmed by HMRC in September 2019 and most commentators believe that there will be little or no change to its content.

Organisations such as the Recruitment Employment Confederation (REC) and the Association of Independent Professionals and the Self-Employed (IPSE) will continue to put pressure on the government, and in particular the new prime minister, to allow more time to implement any changes but again many commentators believe this will not have any or little impact on the timeline and content currently scheduled.

What can I expect from Shorterm?

Now that the draft legislation along with explanatory notes and factsheets has been published, Shorterm will be assessing these documents to determine more details on the impact these changes will have for our contractors. We will also be liaising with the client to determine how this will be implemented and therefore we will update you later this year. Should there be any further updates from HMRC then we will of course furbish you with these in our next communication.

If you are a Shorterm Group contractor and you have specific questions or queries please email our dedicated enquiry channel at questiononIR35@shortermgroup.com and we will promptly respond to your query