Black Friday | 25% off online accounting for 6 months!
The government is introducing changes to IR35 legislation in April 2020. What do contractors need to do to ensure their businesses are ready for the new rules?
We’ve written a number of articles around the subject of IR35, outlining all the IR35 changes that are coming in April 2020 and also how to tell if your contract is inside or outside IR35.
This article will focus on how contractors working through their own personal service company (PSC) can get their businesses ready.
First, a little background information in case you haven’t read our other articles.
The IR35 legislation was introduced in 2000 to ensure that contractors working through an ‘intermediary’ pay broadly the same income tax and National Insurance Contributions (NIC) as an equivalent employee. HMRC believes that many contractors are in fact ‘disguised employees’ and are incorrectly describing their employment status as ‘self-employed’.
If the following apply to a contractor’s assignment, then IR35 legislation must be considered:
Before April 2017, workers operating via a PSC were responsible for determining whether an assignment was inside or outside IR35 and for paying any employment taxes due. However, in 2017 these rules changed in the public sector, which meant organisations such as government departments, local authorities and NHS Hospitals, (and not PSCs) became responsible for assessing the employment status of their contractors and paying any employment taxes due.
On 6th April 2020, the changes made in 2017 to the public sector will be extended to apply to the private sector. From that date, medium and large-sized private sector businesses will be responsible for determining the employment status of a contractor’s assignment, deducting any employment taxes due and paying any tax owed to HMRC.
There’s an exemption for end-clients who are ‘small businesses’ (as defined by the Companies Act 2006) which means meeting two or more of the following criteria:
Where the end-client meets two or more of these criteria, responsibility for determining the IR35 status of an assignment remains with the PSC and the changes do not apply.
One important requirement being brought in by the new rules is the end-client must confirm the IR35 status of an assignment by providing a ‘Status Determination Statement’ (SDS) to the PSC worker. If an agency is involved in the labour supply chain, the agency must also receive a copy of the relevant SDS.
The new rules apply to all UK tax resident workers. If the end-client is an overseas business, it’s likely the new rules will still apply if the PSC (or worker) is based in the UK. This is a complex area and advice always should be taken from an accountant or tax expert based on an individual’s circumstances.
There are a number of reasons why contractors wish to remain outside IR35. They may believe they’re truly self-employed and don’t want to receive the same benefits as an employee (such as paid annual leave and employer contributions to a pension). Individuals also seek the freedom to work with multiple clients and do not want to be tied to a single end-client for regular work.
Many self-employed people operate their own limited companies and enjoy the flexibility and lower taxes involved in taking income from their companies by paying a combination of a tax-efficient salary and dividends. Limited companies can also claim various expenses to reduce the amount of Corporation Tax payable and tax relief may be available when an individual decides to close their limited company.
In addition, being inside IR35 for an assignment may result in a reduction in take-home pay for many contractors if they cannot negotiate an increase in their day rate to accommodate the higher employment taxes paid when an assignment is inside IR35.
The best way to evidence your assignment is outside IR35 is to ensure your contract, and the working practices you follow with your clients, show you are an independent contractor and not a ‘disguised employee’. HMRC will ‘look beyond’ your contract towards your working practices if they query the IR35 status of an assignment.
There are three key principles that will determine your assignment’s IR35 status, as shown below.
Supervision, Direction and Control
This principle considers the degree of supervision, direction, and control your client has over what, how, when, and where you complete your day-to-day work. If your client tells you how to work, the hours you must work or where to perform your work then it’s likely your assignment is inside IR35.
You can evidence an assignment is outside of IR35 by agreeing on a clear set project deliverables with your client for the duration of the assignment. Do not take on other work for the client or let yourself be moved onto different projects that are out of the scope of the original contract terms. You should also ensure your contract clearly states the services your company (and not you personally) will provide.
The second principle examines whether you are required to carry out the work yourself and whether you can send a substitute to perform your work.
Your contract with the client should be in the name of your limited company and should contain a clause allowing your company to send a substitute. However, the right to substitution must be genuine, and must not be so restrictive that your client could reject any substitute you provide. The client may, of course, satisfy themselves that any substitute is suitably skilled and qualified and passes any security clearance requirements they might have.
Mutuality of obligation
Finally, this third principle looks at whether your client is obliged to offer you work and whether you are obliged to accept any work offered to you.
Mutuality of obligation is often difficult to evidence one way or another. All assignments will have a minimum expectation of work to be completed and when it is due to be paid for by the client. A self-employed worker will not expect to be offered work beyond the contracted assignment and would not (contractually) be required to accept any work offered. You should not have a long notice period or any termination clause in your contract. Such clauses may indicate an obligation on the part of the client to provide you with work, and your part, to deliver that work.
Other factors affecting your IR35 status
There are a range of other indicators about the IR35 status of an assignment. The list is not exhaustive and constantly changes based on IR35 cases examined by HMRC. If you are self-employed you shouldn’t:
You shouldn’t be entitled to time off for sickness absence or holidays or to share options or bonuses which are the same as your client’s employees. Your contract may, of course, have an incentive for effective completion, but that must be distinguishable from any arrangements your client has for direct employees.
From October 2019, many medium or large-sized businesses have issued statements saying they will no longer work with PSCs. Others have said all assignments are ‘inside IR35’ and have directed workers towards Umbrella companies or even offered PAYE positions. It’s essential you understand the approach taken by your clients towards IR35. You may be able to work on a combination of assignments, with some being inside and some being outside IR35.
Your clients may accept evidence from you about your self-employed status and to inform the SDS they produce. Some good indicators you are not an employee include:
You should also ensure your marketing materials promote your business and not you personally. It may be helpful if the name of your limited company does not include your own name, i.e. ‘Business solutions limited’ would be better rather than ‘Joe Bloggs solutions limited’.
It may also be helpful to make sure that any online CVs or personal profiles on social media represent you correctly as a contractor, with your own business rather than as an individual, which means:
When your client pays you after 6th April 2020, and you are inside IR35, the client will deduct the necessary income tax and NIC and pay this over to HMRC. Your Take-Home Pay will be reduced unless you have negotiated a higher contract rate.
It’s possible to continue working through a limited company even if your assignments are deemed to be inside IR35. It’s important to remember that IR35 status is based on each individual assignment. So, if you’re working on a number of assignments, some ‘inside IR35’ and some ‘outside IR35’, you need to make sure you have the right accounting processes in place.
Crunch can help with all of this. If your assignment is inside IR35 and your end-client is responsible for determining your employment status and paying you, you can use your Crunch online accounting software to record the necessary payments and deductions for employment taxes.
It’s good practice to be involved in your client’s status determination process, but there is no statutory right for a contractor to be consulted.
Your client must establish a formal process to consider any disagreements. The client will receive your appeal and decide whether to uphold it or not. The whole process is ‘client-led’. Disputes must be responded to in writing by your client within 45 days of receiving notice that you disagree with an assessment.
Carrying out your own status assessment using our free online tool would be a good starting point before considering an appeal. The initial result is free and you can upgrade to a detailed report with an analysis of your areas of risk for IR35. The report should be useful if you need to dispute the status assessment made by your client.
If your client doesn’t apply the rules correctly, or fails to take reasonable care in preparing an SDS or doesn’t prepare one at all, HMRC might decide the assignment is inside IR35. This means the client must pay the relevant amount of income tax and NIC. Your client may also risk financial penalties or even the possibility of a criminal conviction for their failure to apply the rules correctly.
With over 10 years’ experience in the contractor accountancy market, Crunch can help you navigate the IR35 maze. We have a range of information, guidance, and advice on our IR35 Hub, as well as an IR35 calculator that lets you understand whether you’re at risk of being caught by the new rules.
We also offer a range of IR35 solutions for limited companies as well as a hassle-free Umbrella Service if you are working on contracts that are inside IR35. Our Plus package lets you combine both limited company and Umbrella services if you’re working on a combination of assignments both inside and outside IR35. Speak to an advisor today on 0333 920 4791 to see how we could help.