New rules were introduced by the government last month which will impact contractors and self-employed people that do regular work for certain clients. Called IR35, this new legislation has been brought in to make sure that contractors pay the same amount of tax and National Insurance as they would if they were employed by their client.
It relates to an area called ‘off-payroll working,’ where contractors working through their own limited company – are acting as a permanent full-time or part-time employee of their client’s organisation.
What are the new rules?
As of 6th April 2021, the client who hires the contractor is responsible for determining whether their contractor is ‘inside IR35’ or operates ‘outside IR35’.
If a contractor provides services to a medium or large-sized private sector client, they will:
- need employment status determination from the client, as well as the reasons why they made that determination
- be able to dispute the determination given to them if they disagree
If you are ‘Inside IR35’
If the client feels you are operating ‘inside IR35’, you must pay the same tax as an employee. This could also mean that you are entitled to additional rights as an employee or worker (e.g. minimum wage, holiday pay, maternity pay, protection from discrimination). You may be offered an employment contract with your client.
If you’re found to be working inside IR35 but have not become an employee, you will usually have to pay at the end of the tax year any tax deductions or NIC that an employee would have paid.
Am I likely to be Inside or Outside IR35?
The Government has said this will not affect people who work as genuine freelancers. It is targeted largely at contractors who work for a single client for several months or years.
You’re more likely to be considered Outside IR35 if you:
• Work for multiple clients.
• Are paid a variable amount month to month.
• Are paid by the job rather than by the hour.
• Can substitute your labour with another.
• Market your services via a professional website.
• Have your own business insurance and equipment.
You can check the specifics on the Government Website – there is also a Check Employment Status for Tax (CEST) tool to find out if you should be classed as employed or self-employed for tax purposes.
Learning from the public sector
The same ruling was brought in purely for the public sector in 2017. Generally, it led to a reduction in the number of external consultants being taken on by public sector organisations.
I’m a contractor – how can I get around the IR35 legislation?
If you are concerned that IR35 will negatively affect your business, there are a couple of options:
1. Work with small businesses.
There is no change to the rules for contractors providing services to small businesses in the private sector.
2. Work for an umbrella company
If you are a self-employed contractor but operate under an umbrella company, you don’t need to worry about IR35. But being an employee of an umbrella company does not maximise your tax planning and there may be better alternatives.
3. Partner with other contractors
One of the key checks is that you can substitute with other contractors and so an agreement with other contractors may eliminate this issue.
4. Negotiate new rates
Some clients will be open to new ways of working to retain important contract resource.
Note, however, that as an employee you may not be in a worse position. Contracts up to £10,000 can be more lucrative if performed as an employee. Not to mention the added protection and benefits employment brings.
Further help and support
For detailed tax advice and small business support, get in touch. David Wootton & Co are business tax accountants for small business owners like you – we can explore your specific situation and work out the most effective approach for your company.
David Wootton & Co – Lune Valley Accountants. Call us on 01524 236323 or email david@woottonandco.com