FM Property Resources Employers IR35 Job Seekers

IR35 in the Private Sector – What do these changes mean?

September 19, 2019

In 2017, the Government implemented a framework to target perceived tax avoidance by off-payroll workers in the Public Sector by introducing new IR35 assessment rules.

These changes mean that rather than a contractor deciding their IR35 status, the end client/ agency paying the worker must assess whether a contractor is inside or outside of the IR35 framework. The responsibility for determining your tax status would be passed on to your end client and inside determinations would place you onto their or your agencies payroll.

HMRC routinely quotes a statistic that about 10% of Personal Sercive Companies that should apply the IR35 legislation do so. Consequently, 90% are not complying with IR35. The department forecasts that the costs to the Government of IR35 non-compliance will be £1.2bn by 2022-23.

We predict that in some instances, the agency/ end client will only accept contractors operating through umbrella companies and not their own limited company, however, will umbrella companies be able to cope with the higher volume?

So what is IR35?

IR35 is legislation introduced in April 2000 to reduce the amount of ‘disguised employment’ within the UK. The purpose of IR35 was to stop individuals being able to plan their taxes and have the ability to reduce their tax and NI liability.

Ask yourself this question. If you left your employer at 5 pm on Friday and then returned to the same employer as a contractor with the same benefits and packages of doing the same role. Would you be deemed as being inside IR35?

Will this affect your income?

If your contract is classed as inside IR35, then you will have to pay tax and National Insurance contributions on your full income, as if you were a permanent employee in said company. This means you can’t take advantage of reducing your tax and NI contributions by paying yourself a low salary and topping it up with dividends.

You will notice the introduction of IR35 may reduce the benefits of running a limited company. Within IR35, you will have a reduced allowance for expenses and only be able to claim for tax relief on specific things. These include:

  1. Employer contributions to pensions schemes
  2. The gross salary paid plus NI contributions
  3. Professional indemnity or personal liability insurance
  4. How is IR35 status determined?

The IR35 status is determined by the contract and not the individual. When you consider taking on a new contract, it is crucial to understand whether the working relationship is inside or outside of IR35. This can be quite a difficult task as the working relationship with your client may not be known until you start working for them.

A contract can be determined as being inside IR35 if you will have the same level of risk, liability and responsibility as a permanent employee within the same business. Be sure to assess the working practices and the practical matters which could affect how your contract is seen.

Who decides your IR35 status in the private sector?

The 2020 changes to the IR35 legislation in the private sector, will mean that the end clients (medium and large-sized businesses) will be responsible for determining the status of the contractor.

The “fee payer” (agency or end client) will be responsible for ensuring the deduction of the relevant tax and NICs. Small businesses are currently not affected by the IR35 legislation.

How to deal with IR35 if you are an end-client

As a medium or large-sized business who is engaging the contractors, it is essential to be completely aware of the changes you need to communicate:

Determining the status of Off-Payroll workers. Once the IR35 reform is introduced, the end client will be responsible for determining the IR35 status of its contractors. The end client will also need to liaise with all parties to communicate the decisions made.

  1. Consult with Personal Service Companies / limited companies. Communicating decisions made to all parties to ensure no walkouts is crucial.
  2. IR35 training. Ensure any internal resources or employees are fully aware of the rules of IR35.
  3. Liaise with third parties and agencies. Inform agencies of any determination that is made on a contractor, if the contractor is inside IR35, they will need to deduct correct PAYE and NI contributions as though the worker was a permanent employee.

How to deal with IR35 if you are a recruitment agency

As a recruitment agency, there are a few steps which should be considered and actioned to prepare for the changes:

  1. Speak with end clients. Liaising with end clients who you place contractor with is needed to establish clear forms of communication to ensure the placement of every contactor adheres to IR35 legislation.
  2. When the reform is enforced. The fee payer will be responsible for running payroll for contractors. This means you may have to deduct the relevant tax and NI contributions for each individual based upon being inside or outside of IR35.
  3. Reporting. It is vital to keep records of payments which are made to contractors as will need to be reported to HMRC using a Full Payment Submission, very similar to that of PAYE worker.

How to deal with IR35 if you are a contractor

The private sector reform follows the changes of the public sector reform, where the responsibility for determining your tax status is passed on to the end client if you are contracting for medium or large-sized business and are deemed to be inside IR35. It may also be that in instances that you are required to operate through an umbrella company.

Here are some steps you should consider:

  1. Communicate with the end client or agency. Understanding the intentions of the end client is the first step to understanding what will happen.
  2. Speak with a qualified tax specialist. This will cover any unknown facts or grey areas.
  3. Check your status. It is important to check your status as this could give you an indication as to whether you are inside or outside of IR35. GOV.UK has an IR35 calculator to help you understand the status of your contract.