If you’re a freelance contractor working for an end client, you should be aware of the IR35 tax regulation, commonly known as the ‘off-payroll working rules’. New rules around IR35 come into effect on 6 April 2021, after a delay due to the coronavirus pandemic.
The government has said that the idea behind IR35 is, “to ensure that people working like employees, but through their own limited company, pay broadly the same tax as individuals who are employed directly.”
The new rules bring sections of the private sector in line with the public sector.
Does IR35 affect me?
Before 6 April 2021, a self-employed person who provided services to clients in the private sector via their own limited company, known as a Personal Services Company (PSC), could decide their own tax status and bill them through that limited company. If the end client was in the public sector, the client decided the contractor’s tax status.
As of the 6 April, the new rules require medium and large sized private sector end clients to determine the tax status of the contractors that work for them. As in the public sector, the end client will have the power to decide whether a contractor is self-employed, or should be brought onto their own payroll and pay tax and national insurance just like an employee would.
This may involve an increase in tax and national insurance for both contractors and paying clients.
Who does IR35 not apply to?
The new legislation doesn’t apply to end clients that are small, private companies. Any company that meets two out of the three criteria - annual turnover of no more than £10.2 million, assets of no more than £5.1 million and no more than 50 employees - will be exempt.
Freelancers and sole traders, who do not operate under a PSC, are exempt by definition.
How do I prepare?
Ask your end clients for a Status Determination Statement (SDS), to find out if you will be on or off payroll.
“Contractors should engage with their end client now to discuss and negotiate, rather than sit and wait for an IR35 status decision to be made,” says Victor Korman, CEO of Cogent Accountants and Starling business customer.
Christian Hickmott, managing director at Integro Accounting, also a Starling business customer, adds that some end clients are changing the way they work with contractors, offering a fixed fee for a project, rather than rolling contracts on a day rate.
How do I appeal a client’s decision on my tax status?
You need to appeal to the end client. They have 45 days to respond. To support your appeal: gather evidence of your working situation; ask your accountant to check your contract and complete the HMRC’s Check of Employment Status Tool. The tool helps assess if you’re self-employed, or an employee not on payroll, and results can be submitted as evidence.
Who has the final say in the appeal process and what are my options?
The end client has the final say.
“The appeal allows the end client to go back and see if their information is correct, but the process could take several weeks and there is no guarantee of a different outcome,” says Starling business customer Zeeshan Anwar, group compliance manager at Dolan Accountancy.
If the contractor or agency is declared to fall within IR35 rules, your options include:
- Work under IR35, with adjusted National Insurance contributions and PAYE tax (you could try negotiating higher fees to compensate).
- Go in-house and join the staff on payroll.
- Work for an umbrella company or agency, which takes responsibility for payment and tax.
- Work with smaller end clients.
Should I wind down my Personal Services Company?
The experts advise you not to rush this decision.
“I’ve seen many clients pause their PSC for three to six months, while they’ve worked on a contract for an umbrella company inside IR35, and then come back to use the PSC if they take up a contract outside of IR35 after that,” says Hickmott.
Speak to your end clients, discuss how they will assess whether you are on or off payroll. Use the HMRC tools and seek guidance. Speak to an accountant and tax expert, and start thinking about diversifying your income stream if necessary.
The above article is intended as general information and does not constitute advice in any way. You should take independent legal advice if you have any questions about your specific circumstances.