How are the IR35 changes going to affect me?
If you’re currently working through your own limited company on a contract basis then there are some tax changes HMRC are pushing through that will potentially affect you from April 2020. Here’s our guide to what’s changing, why and how it will affect you.
What is IR35?
IR35 is a piece of legislation that governs how contractor tax should be calculated.
What’s the current situation?
Permanent employees pay their tax and NI through PAYE but contractors working through their own limited company pay themselves via dividends, which is at a lower rate of tax. Currently it is up to the individual contractors to assess themselves if they fall within the scope of IR35. It is in their interests to consider themselves outside of IR35 as there is a lower tax liability.
The government believes that this “off-payroll” way of working is unfair and often equates to “disguised employment”. It wants everyone working under the PAYE model, which they (mistakenly?) believe will generate more tax revenue. In reality of course contract workers are very different from permanent workers and don’t have the same benefits or protections that permies do and so it makes sense for them to be treated differently.
What changes are coming?
We’ve known that this was coming since the 2018 Autumn statement. The changes are largely in line with those rolled out across the public sector so companies and contractors have had time to prepare. For any payments made after the 6th April 2020 the client will be required to assess if the role should be treated as within or outside the scope of IR35 instead.
The important thing to remember is that what is considered within and outside the scope of the legislation hasn’t actually changed. Someone who will be considered caught by the legislation in April 2020 is also technically caught by the legislation now. The only change is who is assessing the contractor’s status and who is financially liable for any unpaid taxes.
How will I be affected by the IR35 changes?
If you are working through an umbrella company then you will not be affected by the legislation as you already pay PAYE tax (as a quick aside it’s worth double checking that your umbrella company is compliant.
If you are deemed to be outside the scope of IR35 then you can continue to work and pay taxes in the way you currently do through your limited company.
If you are deemed to be within the scope then your income will need to have the appropriate tax and NIC deductions made, which potentially may be significantly higher than you were paying previously. The simplest way of doing this is by using an umbrella company and many recruitment agencies will require you to switch to one in order to continue your contract.
How do I know if I’m within the scope of IR35?
Whether or not you’re considered to be in “disguised unemployment” will be determined by the client and you will be told in advance. HMRC recommends that companies use their CEST tool to assess this. Most recruitment agencies will tell you the IR35 status when first discussing the role but if they haven’t then please ask, it has a direct impact on your take home pay. When HMRC is considering a contract status they look at the actual working practices, not just the contracts that you have in place.
It’s important to note that these changes will not apply to small businesses. Your recruitment agency will be able to tell you if the end client qualifies as a small business.
What does HMRC consider when looking at off-payroll status?
Previously your IR35 status was largely based on your contract so people tended to include “IR35 friendly” clauses but HMRC got wise to this. Now it is much about the actual working practices, which is part of the reason why the client, and not the recruitment agency, are responsible for making the assessment. Some of the key areas they consider are right of substitution (and who pays the substitute), who is taking the financial risk, if contractors identify themselves to external customers as working for the client or if they’re integrated within the business (ie responsible for hiring/firing, appraisals etc). In short it seems that anyone other than people who are working on specific, short term projects for multiple clients will be considered within scope.
What is the CEST tool?
This is the online questionnaire created by HMRC to assess employment status. They say they will honour the outcome of any result using this tool as long as the answers were given in good faith. Only they determine what in good faith means if it ultimately turns out that the result is wrong. There are 16 questions in the tool but many legal experts believe that the wrong questions are being asked and that there is no scope for real-life nuances. The tool also hasn’t been based on actual case law which essentially implies they’ve made it up as they go along. In short CEST gets a LOT of bad press. For now though it’s what we’re stuck with and completion of the tool is the best way to stay on the right side of HMRC.
What do I need to do now?
If you’re working through an umbrella company then you don’t need to do anything. If you’re working through a limited company and your contract is going to go beyond April 2020 ensure you’ve had confirmation from the client if the role will be considered inside or outside of IR35. If the role will be within IR35 then you need to start considering your options. Talk to your recruitment agency. If you’ll be required to work through an umbrella company check then do some research into which company you want to use. Don’t be tempted by high take home rates though – they could land you with a big tax bill in the future. Check out our blog on umbrella companies, compliance and take-home pay here.
Once you have selected an umbrella company you need to find out what impact the changes will have on your take home pay. What adjustments, either in your finances or your contract, will you need to make?
Everyone thought that the public sector changes were going to be catastrophic to the contracting industry but it wasn’t. Yes there will be some slight changes but contracting is still a working model that works well for so many people. That’s not going to change just because of a shift in legislation.
Victoria is the Office Manager here at Corriculo Ltd. After working as Recruitment Consultant for 5 years, she moved into Office Management over 11 years ago now. Victoria was one of the first members of our team and deals with all of our administration and accounts. Connect with her on LinkedIn