From April, thousands of self-employed contractors and freelancers will face a higher tax bill as HMRC makes changes to IR35, legislation designed to crack down on a tax loophole that has been used by self-employed workers operating through a limited company.
To reduce their tax burden, many contractors worked as “disguised employees”, operating as permanent employees but contracted through companies.
With IR35, contractors will now be required to make extra payments to compensate for the extra tax and National Insurance that HMRC would have received if the contractor had been a permanent employee of a firm.
The chances are that you’ve read a lot about IR35 over the past few months, and wondered how it might affect you. Below, we’ve rounded up ten things that you need to know about…
Your income could suffer
Let’s start with a biggie.
The majority of contractors work for large or medium-sized corporations, and as such, IR35 applies.
The average take-home pay for a freelancer will fall by around 20% by moving onto the payroll, but this can be overcome by negotiating a better rate of pay from your client.
According to a report in This Is Money, freelancers will pay around £9,000 more tax per year because of the changes, but if you provide services to multiple clients, you should be able to continue working as a limited company. Speak with an accountant as soon as you can.
Rules come into effect on 6th April
The new IR35 rules come into effect on 6th April 2020, and it was initially suggested that clients and contractors would have to backdate their taxes.
However, the government has relaxed its stance, and now private sector businesses will only have to apply the changes to IR35 off-payroll legislation to contracts carried out after 6 April, which is good news for you.
Small organisations are exempt
If you’re working for a small company that has a net turnover of less than £10.2 million, a balance sheet of less than £5.1 million and fewer than 50 employees, IR35 won’t apply to you.
Make sure you know the classification of your client before you change your company set-up, as you may be able to slip through unscathed and continue to operate as normal.
Your client is responsible for determining IR35 status
When private sector changes go into effect this April, the end-client will be responsible for determining the IR35 status of a contract with a Personal Service Company (PSC). Speak with your client as soon as possible if they’ve yet to issue guidance on the IR35 changes.
Things are trickier if you have overseas clients
If you work for an overseas end-client, you’ll need to discuss how they’ll be implementing the new regulations. According to HMRC, overseas end-clients will need to provide a Status Determination Statement, and it’s important to note that IR35 applies if you pay taxes in the UK. If you’re living abroad temporarily and working for an international client, you’re exempt.
Working with an umbrella company can help
According to a recent study from APSCO, 91% of recruitment companies expect umbrella company usage to soar following private sector changes. Contractors are shunning their personal service companies and are instead turning to umbrella companies to process the payroll. Working with an umbrella contracting company like Evolve CS means all taxes will be deducted before you’re paid, and you’ll pay a £9.99 fee for each timesheet we process.
The government tool has faced criticism
You can find out whether you’re ‘inside’ or ‘outside’ of IR35 changes by checking your employment status for tax on the HMRC website, but both accountants and contractors have criticised the tool for delivering inaccurate decisions about workers’ tax status.
The tool has since between tweaked to offer more information and clarity, but if you’re in any doubt, your best bet is to speak to an accountant to discuss your individual circumstances.
There are three main factors to consider
There are a number of factors in determining whether you fall inside or outside of IR35, but the three most important are:
- Mutuality of obligation: As a self-employed contractor, you’re able to work on any project without an obligation to work for that client once the contract is complete. If a client is obliged to offer you paid work and you take it, this falls into a contract of employment, and you fall within IR35. As does demanding exclusivity during a job.
- Substitution: If a client says that it wants you to work on a project from start to finish, this falls within IR35. If your contract states that substitute workers you supply can complete the work instead, this falls outside of IR35 as you operate a business offering services, rather than offering yourself to businesses.
- Supervision, direction, control: In order for a contract to fall outside of IR35, you must have control over how you complete the work. If a contract sets out working patterns or has input into how the work is completed (for example, you must work every Monday to Friday from 9 am to 5 pm and only take a 30-minute break for lunch), then this will likely fall under employment work and be subject to IR35.
Companies could suffer the most
Employers would need to increase their National Insurance contributions by 37% to maintain the salary or income of a freelancer who moves onto a payroll. To be blunt, that’s not going to happen, meaning freelancers and contractors must foot the bill. As a result, more than half of the contractors and consultants working for private companies plan to leave clients, which will result in skills shortages and ultimately more expensive labour, impacting profitability.
HMRC could rake in an additional £1 billion per year
The latest round of changes to IR35 is expected to affect 170,000 contractors in the UK who work through Personal Service Companies. According to HMRC, less than 10% of all PSCs that should apply IR35 legislation actually do, and when rules are changed this April, HMRC says that it will be able to collect an additional £1.2 billion in tax and NIC per year by 2023.
Evolve Contract Services is proud to be one of the best umbrella companies in the UK. Stay tuned for more IR35 developments.