The 6th April 2021 marks the ‘go live date for the IR35 tax legislation to enter the private sector. It’s one of the biggest changes in tax legislation, and its impact on the contracting industry will be felt far and wide.
We’ve spent the last few months attending various seminars on IR35 to help our clients and contractors to navigate their way through the minefield of legislation and remain compliant.
In case you’re unaware of IR35, here’s a guide and handy infographic…
What is IR35
Its purpose is to close a tax loophole where contractors could set up their own limited company to reduce their tax liability.
When a limited company contractor commences an assignment, the contract is with the limited company itself. In reality, it’s often more likely an employer-employee working arrangement, and HMRC has considered that they should be taxed as an employee. This is often referred to as a ‘deemed’ employee’.
IR35 is looking to identify ‘deemed employees’ and ensure they pay the necessary amount of tax; however, it will also greatly impact individuals who are genuinely operating through a limited company structure.
It also had an impact on UK personal service companies (PSCs) – in lay terms, these are limited companies with a sole or majority shareholder/director who delivers the services of the company.
Current and previous governments have taken the view that contractors were exploiting the tax system for limited companies by leaving permanent roles to create limited companies. And carrying on working at the same business in a limited company capacity while paying considerably less tax and national insurance than when they were permanently employed.
Since IR35 legislation was introduced in 2000, contractors viewed to be employees in HMRC’s eyes (‘deemed employees’) have been made to pay tax at the same rate as employees. This is also more than they’d have to pay if they were deemed to be limited companies.
Why is IR35 Happening?
While ‘deemed employees’ must pay the equal amount of tax as comparable employees, they do not have any of the benefits that permanent employees have, such as holiday entitlement, company pensions and sick pay. Many of those opposed to IR35 have viewed this as unfair.
Why does IR35 compliance matter?
In its current guise, contractors are responsible for carrying out their own assessment of whether they fall inside or outside of IR35. If you incorrectly complete the assessment stated, you’re outside of IR35. If you’re viewed by HMRC as a ‘deemed employee’ and classed as inside IR35, then you’ll be required to pay back taxes of up to six years, plus interest and penalties.
From April 6th 2020, the client (or fee payer) will be responsible for determining whether an assignment is inside or outside IR35 and whether the contractor is treated as a ‘deemed employee’ and is taxed accordingly. They will also be responsible for paying employers’ NICs and the apprenticeship levy. More importantly, the client will be potentially liable for any unpaid tax and NICs if HMRC takes the view that they haven’t taken ‘reasonable care’ in assessing the contractor’s status.
There is a partial exclusion of IR35 for SME’s. In HMRC’s eyes, this is defined as not exceeding more than two of the following criteria
- Annual turnover above £10.2m
- Balance sheet total of over £5.1m
- More than 50 employees
What are the implications of working ‘inside IR35’?
When working inside the IR35 legislation, you’ll be required to pay NIC’s and income tax on your earnings. (This is instead of a blend of dividends and minimum salary taken from your limited company). You won’t, however receive any employment benefits such as sick leave, company pension or holiday entitlement from the company you’re working at.
For contractors currently working in the private sector, this is paid via a ‘deemed payment’, which is the payment you’ll be required to make to HMRC at the end of each tax year. This must also consider the additional tax you have to pay as a result of working inside IR35.
Calculating the ‘deemed payment is a complex and often convoluted matter. Hence, why many contractors are seeking external advice and support for it.
Contractors who fall inside the scope of IR35 and inside the rules for medium and large do not need to make the calculation themselves. Under the new legislation, your fee-payer will do this on your behalf and deduct the NICs and Income Tax from your invoice before paying you.
Contractors will be permitted to know how the decision on their IR35 status has been reached. If they cannot agree, a process of appeal to the client by the contractor must be available. HMRC will not have an exact appeals process in place, and the contractor can only raise disputes through the income self-assessment process.
Determining IR35 status
In the run-up to IR35, HMRC released an online tool called ‘Check Employment Status for Tax’ (CEST). Its purpose is to help clients/fee payers to determine the status of contractors they have on an assignment.
Once the clients/fee payer has completed the checklist on the site, they will receive a ‘Status Determination Statement’. This should be issued to the contractor on the first day of their assignment and must include the decision made as well as the reasons behind this decision.
Failure to provide contractors with the statement will mean that they haven’t met their obligations and will be liable for any incorrect deduction of tax until it’s been provided.
IR35 Next Steps…..
To ensure everyone remains compliant with the legislation, it’s of major importance that all parties in the supply chain are working together.
If you’re a contractor and aren’t responsible for deeming IR35 status, you still are able to work with the recruitment business and client to increase the chances of it being accurately viewed.
While all of this may seem like a massively complicated matter, we are able to provide detailed assistance with the new legislation. We’ve also partnered with a number of external companies across the legal and umbrella industry who can also give detailed advice and support.