Whilst IR35 changes affecting off-payroll workers in the public sector have only been in force since April 2017, in the recent Budget, the Chancellor has announced that from April 2020, the same, or similar, regulations will be extended into the private sector.
IR35: the key facts
Organisations have always needed temporary resource, but taking on additional headcount can be an issue for various reasons. Many individuals wanted the flexibility (and earning power) from being able to freelance. Doing so through a limited company suited both parties and allowed the freelancer to maximise their tax position.
IR35 – or the Intermediaries Legislation to give it its full title – came into force in April 2000. Its purpose was to tackle disguised employment, specifically relating to contractors trading through Personal Service Companies (PSCs).
IR35 enables HMRC to create a ‘hypothetical contract’, and to bypass the Intermediary (the PSC) and ask: “What would the relationship look like if the individual doing the work was actually engaged directly by the end client? Would it be one of employment or self employment?”
If HMRC could argue employment, then in simplistic terms, the PSC would have to apply PAYE to its earnings from that engagement. Determining the ‘IR35 status’ of an engagement was the PSCs decision and therefore liability rested with the PSC.
The proposed changes
The key issues have not changed. Determining status will still rely on the three primary factors of personal service, control and mutual obligation (with secondary consideration of financial risk and business enterprise).
However from April 2020 if the end client engager is a medium or large company, determining the ‘IR35 status’ will become the end client engager’s decision and no longer the decision of the PSC.
It is expected that the number of PSC’s caught under IR35 will increase from 3% currently to 33% once the new changes are in force.
How does this affect me as the contractor?
By having the decision process moved to the end client, you may disagree with the decision or be affected by blanket decisions imposed by the end client. Therefore you may find yourself taxed effectively as an employee under IR35 but still having the running costs of your limited company which can no longer be offset for tax.
What can I do about it?
Although the changes don’t come into force until April 2020, you may be negotiating contracts now that span over that period and therefore could be affected. These contracts should be reviewed and the status discussed with the end user client.
Although the decision making process will have been removed from the PSC you can still influence the decision by having a robust argument as to why the company should not be caught under IR35.
One way to strengthen this argument is for a contract review. We can review your contract, clearly establishing their IR35 position. Our opinion is presented within a detailed report, which is clear and concise. We will always try to strengthen your position by suggesting alterations within our report where these wouldn’t fundamentally alter the terms of the contract.
Contact us if you would like a contract review or if you would like to discuss any of the changes in more detail on 01423 431889 or email catherine@bctaccountants.co.uk.