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It is anticipated that new regulations will become effective beginning in April 2021, and these regulations will apply to all independent contractors, regardless of the size of the company they work for.
Because of the widespread coronavirus epidemic, the implementation of the changes to IR35 that were adopted in April 2017 and applied from that month forward for the public sector and were initially scheduled to take force in April 2020 has been postponed until April 2021. The IR35 rules are intended to eliminate any potential financial benefit, including tax savings and savings on national insurance premiums, that may result from the employment of personal service businesses and partnerships.
As a result of the changes, the individual contractor will no longer be responsible for operating to the off-payroll rules; instead, the obligation will transfer to the engager.
This adjustment will only apply to organizations in the private sector that are considered to be medium or large in size. The arrangement will continue as before, and the contractor will continue to be responsible for ensuring compliance with IR35 even if the engager is a small company due to these changes. For these discussions, a company is considered tiny if it satisfies two of the following criteria: less than £10.2 million in annual revenue; a balance sheet of less than £5.1 million; or fewer than 50 workers. The rules will be determined solely by the yearly income of non-corporate businesses (10.2 million pounds).
What will occur as a result of the changes in the private sector?
Status Determination Statement: The engager must communicate to the worker their decision about the worker’s status in the form of a document referred to as a Status Determination Statement (SDS). Up until this point, the person who engaged the worker is the one who is responsible for paying taxes and national insurance. However, it is crucial to remember that the position is more complex than this if the supply chain involves a number of different parties (such as agencies).
You are free to have disagreements with an SDS. However, you have given the engager forty-five days to reply to you, after which it will either stand by its first answer or publish a revised SDS.
Outside IR35: If it is determined that a contract falls outside of IR35, you are free to continue compensating yourself in the same manner you have done up to this point. However, if HMRC reverses its decision later, your agency or the person you engaged will be responsible for paying the amount.
Inside IR35: If it is determined that a contract falls inside IR35, your agency or engager will be required to collect PAYE and NI from your income before they pay you beginning in April 2021. You may operate to do business via your own company, but you will be taxed as an employee from a tax perspective. Once your company receives the money, you will be eligible for various tax credits that will prevent you from paying taxes a second time. Despite this, you will not have the same job rights as a typical employee.
There is not much time left to adapt to these changes, and there is a growing risk that agencies and engagers would force contractors into operating either under IR35 or via an umbrella company.
In the long run, contractors may have much lower take-home income. For example, if a person has a fee income of £100,000, falling under IR35 might cost them an extra £7,000 to £8,000 in tax and national insurance payments.
What are my options if I am inside IR35?
If it is determined that you fall within the scope of IR35 due to the conditions described above, the primary options that are open to you are likely to be as follows:
- Continue as a PSC under IR35. After that, your engager will calculate and deduct PAYE from your pay.
- Join the engager’s team as a full-time employee.
Utilizing the services of an umbrella company is still another option. You would be taxed in all intents and purposes as an employee by the umbrella company since you would be employed by it under an overarching contract of employment. Umbrella firms can shoulder a portion of the administrative load; however, it is very doubtful that this would result in any cost savings, and it may also cause a delay in payments reaching you. If you decide to go with an umbrella company, it is imperative that you carry out the necessary research and make sure you are familiar with all of their policies.
It’s possible that operating via a limited company under IR35 may end up being the most beneficial option for you, but every circumstance is unique. Also, remember that IR35 is applied on a contract-by-contract basis; thus, some of your contracts may fall inside IR35 while others would not.
What actions may you take in response to the changes in the private sector?
Although every circumstance is different, we feel that there are several steps that you need to take to be ready for these changes.
Talk to your agency or the person you are working with to determine their goals and the options that are open to you. It would help if you had this conversation with your agency or the person you are working with. In some circumstances, these conversations will have already begun, and you will most likely have explicit knowledge of their plans.
Talk to the Other Contractors Your engager uses There are probably other contractors that your engager uses, and you should talk to those contractors. This will make it easier for you to exchange information and give you a better chance of arriving at a collective answer, which might strengthen your position.
CEST is an abbreviation for the ‘Check employment status for tax tool provided by HMRC. This tool may be used online for free. It’s beneficial for the worker, the engager, or the agency to determine their status using this information.
It is encouraging news if the CEST tool concludes that your contract falls outside the IR35 tax bracket. “HMRC will stand by the outcome issued unless a compliance review determines the information provided isn’t correct,” it states on its website.
Do not give up hope even if the CEST tool concludes that the contract falls inside the IR35 tax bracket. The outcomes produced by the tool do not have to be the only factor considered for determining job status.
Your engager will make any decision on any determination. It is possible that they may not understand the facts in the same manner as you do and will consider a number of other factors while reaching their decision. The CEST is a non-mandatory instrument subjected to extensive criticism due to the apparent gaps in its functionality.
Review of the Contract
If your agency or engager takes a reasonable approach to the rules, and you are trading outside of IR35’s scope of coverage, then you should be able to continue to operate as you always have in the same manner. However, if your agency or engager has asked you for your opinion on whether or not the rules should apply to your company, we can put you in touch with service providers who will be able to give an expert opinion on your specific circumstances. If this has happened to you, please let us know so we can assist you.
Remember that the parameters that determine IR35 have not been altered, which means that anybody who is now operating outside of IR35 should, in principle, be allowed to continue doing so. Nevertheless, the engagers are compelled to review their position due to these changes. Furthermore, although the statute prohibits it, certain engagers may adopt a blanket approach; thus, it is imperative that you be clear on your position before April 2021.
Accelerate payments
The new rules will apply to payments made after April 2021, which means that they will include any previous work that was delivered but not paid for. Therefore, you may wish to take measures to ensure that your bills are raised at a convenient time so that payments are received before the 5th of April 2021. We strongly suggest you have an immediate conversation about this matter with your client and inquire about obtaining guarantees that the appropriate payments will be made before the new regulations go into effect.
The Pay Scales
If it is determined that you fall inside IR35, you may want to review your payment arrangements with the end user to ensure that you receive enough compensation for the increased tax and national insurance you will be required to pay.
Are the changes to IR35 going to affect you in any way?
In the end, the engager is the one who will determine whether or not your IR35 status is maintained. Therefore, it is essential that you be well educated. Spend some time being acquainted with the changes that have been made, and figure out how the ramifications of being within or outside of IR35 relate to your circumstances.
If you would like to go through this topic in further detail, please do not hesitate to call Tax Accountant at the following number: 0800 135 7323 or use our online question form.