Please be aware that on the 17th March, the government announced that IR35 tax reforms will be delayed for one year, due to the huge challenges faced by businesses at the moment. The measures will now come into effect on the 6th April 2021.
If you’re a freelance contractor providing your services through a Personal Services Company (PSC), you need to know about a tax regulation called IR35. The new rule, which kicks in on 6 April, ensures that private sector clients will determine the tax status of their contractors, rather than the contractor setting it themselves. The aim is to bring the private sector into line with the public sector. It is likely to be the biggest change to how certain SMEs, agencies and contractors get paid and pay their tax in 2020.
Following concerns from some contractors on implementation, the government has launched a review of the plans, looking into how they can roll out IR35 as smoothly as possible. Experts say the change is still likely to go ahead - therefore it’s important to learn whether you might be affected and how you can prepare. IR35 is also known as the “off-payroll working rules” which is a good way to remember it - it applies to people who are not on the employee payroll of a client.
Does IR35 affect me?
Up until now, all self-employed people who worked under a Personal Services Company (PSC), such as an LLP, could decide their own tax status and would be paid the gross amount by their client. That will soon no longer be the case for everyone.
As of 6 April, clients will have the power to decide whether the contractors, agencies and companies they work with are self-employed, or should be brought onto their own payroll and pay tax and national insurance just like an employee would.
Who does IR35 not apply to?
IR35 will not apply to paying clients that are classed as small companies. In other words, if a contractor is paid by a small company, business will carry on as normal. Under the Companies Act 2006, 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 fewer than 50 employees) will be exempt.
The other way round does not apply, however. So, if you are a small business providing services to a medium or large private sector end client, IR35 might still apply to you.
Second, freelancers and sole traders who do not operate under a PSC will not be affected.
“For freelancers, if you directly contract with your client it won’t make any difference; IR35 only applies if you operate through a company,” says Neal Todd, tax partner at Fladgate LLP, a City-based law firm.
What is the first step if I do fall under IR35?
Delia Porter, founder and managing director of Business Clan, a firm that helps SMEs with strategy, marketing and tech, says the first step is to review every contract you have with an end client and ask for a Status Determination Statement (SDS).
An SDS is a written statement that should be provided by every end client to their agency or contractor as soon as possible, if they have not already, letting them know whether they will still be regarded as self-employed come April. Since contractors are often paid a month in arrears, IR35 also affects payment of any work done in March.
“My clients’ worries include how it will affect their take home pay, which is why it is important to review and possibly renegotiate fees. Also, the time it may take to receive an SDS and whether there will be a knock-on delay in getting paid whilst new systems and processes are put in place by their end clients,” says Delia.
“To avoid such delays, it’s best to start talking to these businesses sooner rather than later to agree timeframes for determination and payment.”
How does IR35 affect my take-home pay?
Falling inside of IR35 means an increase in tax and national insurance for both contractors and paying clients of around 20 to 30% generally speaking, says Marc Seymour, director of TaxEvo. This is because self-employed people can offset their tax with business expenses and take dividends out of their company instead of paying income tax.
“We look at the contract and working practices of our clients and plenty of them are outside of IR35,” says Marc. “Some are inside but not all. A blanket approach, as some companies are taking, is wrong and doesn’t follow the legislation, which says that due care and attention should be taken when assessing status.”
Marc adds: “You cannot start a new contract without knowing your status as it impacts how you’re paid.”
How can I disagree with my client’s decision about my tax status?
The contractor or agency has 45 days to respond to the end client’s decision in the SDS.
To help your case, it’s worth trying out the HMRC’s Check of Employment Status Tool. It will ask you a series of questions, for example whether you mostly or entirely work for one client, and where you work. The questions are designed to evaluate whether you have a diverse income stream as a self-employed person or whether, as Marc explains, you are essentially “an employee in disguise”.
“In the appeal you need to say why you don’t agree (with your appointed tax status), for example, you can use evidence from the HMRC assessment tool (if it shows you’re outside IR35) - that’s probably the strongest possible result for appeal, and I strongly recommend you talk to an expert or accountant also.”
There should not be too much of a grey area here, adds Neal from Fladgate LLP.
“If you work for lots of different people, you have no guarantee of work or obligation to attend work, and you’re not asked to the Christmas party and so on, than you are not seen as an employee and this can be made clear to the client and HMRC,” he says.
Who has the final say in the appeal process and what are my options?
The end client has the final say.
If the contractor or agency is declared to fall within IR35 rules, they have several choices. One is to work within the IR35 rules and let the end client deduct tax. In this case, says Delia, you probably want to review your fees as all business expenses, such as accountancy fees, will come out of post-taxed money.
“This is one reason why you should consider whether it is time to go in-house,” she says. “The tax advantages of working through a PSC are gradually being removed, and the benefits of being an employee may outweigh the benefits of being a contractor.”
As she says, a second option is to go in-house, if that route is available.
A third option is to part ways and find other clients. A fourth, says Marc, is to join an umbrella organisation, like an agency.
“The umbrella company is your employer - you have a contract of employment with them and they have a contract with the agency or end client, and the umbrella company deducts tax and NI and pays you the net amount,” explains Marc.
Start reviewing your contracts now. Think about negotiating higher fees if necessary and ask your clients for an SDS. The HMRC tool is also there to help you, as is HMRC guidance. An expert, such as an accountant, is a good resource. And whatever your status, always keep adequate records so that you have a financial audit trail.
The above is intended as general information and guidance and does not constitute advice in any way. You should take independent advice if you have any questions about your specific circumstances.