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IR35 reforms will apply to the Private Sector in 2020
The much anticipated IR35 reforms to the private sector have been announced and will take effect from April 2020. The exact detail will be determined next year following a further consultation in the summer. For now, we should anticipate that reforms will follow a similar path to the Public Sector changes in 2017.
In response to the concern that small businesses would struggle with the requirements of the reforms, there was a concession to exclude end clients who are classified as small companies under the Companies Act 2006.
A small company must meet at least two of the following conditions:
• annual turnover must be not more than £10.2 million
• the balance sheet total must be not more than £5.1 million
• the average number of employees must be not more than 50
In reality the majority of contractors in the private sector are employed by very large companies, therefore many will feel the impact of the reforms when they come into play.
What is IR35?
IR35 targets individuals working off-payroll, typically through their own limited company.
There are 3 key tests to determine whether an individual is Inside IR35.
whether they have control over how work is completed;
whether there’s a mutuality of obligations; and
whether the individual has to personally complete the work.
The result of being Inside IR35, means that all contract income paid, should be treated as employment income and subject to all the usual tax and national insurance calculations.
Why are the reforms happening?
In simple terms HMRC have determined there is widespread non-compliance with IR35.
Quite simply they do not believe that contractors have correctly assessed their IR35 position and therefore not enough tax is being paid. It would be a difficult and time-consuming task to take each individual contractor to account, so therefore the reforms shift the responsibility for assessment to the end client, who will face severe penalties if they get it wrong. This means we are likely to see a large number of contractors who have assessed themselves as Outside IR35 being deemed as Inside IR35, either because they are, or because the end client has determined that commercially the easiest path is to blanket assess contractors as Inside IR35. They do however have a duty to take ‘reasonable care’ in making their assessments, so there is likely to be a lot of debate on how assessments are made, particularly as the government employment status tool, CEST (Check Employment Status for Tax) has been widely criticised as ‘not fit for purpose’.
So, how will the likely reforms affect a contractor in the Private Sector?
The IR35 legislation, as first introduced in 2000 still applies and the rules for determining whether a contractor and their working practices are caught by this legislation remain the same. When IR35 does apply, the fee payer (i.e. the company that pays the contractor) will need to deduct PAYE and Employees National Insurance Contributions and pay Employers National Insurance and Apprenticeship Levy contributions (13.8% and 0.5% respectively) in respect of all payments.
It was also announced that anyone assessed as being Inside IR35, who had previously treated themselves as Outside IR35 on the same contract will not be pursued for the tax loss and penalties. Take this message with a pinch of salt, as what is said and what is done within the realms of HMRC can often be two completely different things.
What steps should a contractor take now?
Contractors must resist the temptation to put off considering how the reforms will affect them. Now, more than ever, they need to understand what their current position is and what it is likely to be in April 2020.
The entire labour supply chain above the contractor, employment agencies and end clients, will be looking closely at how the reforms will impact their business, their financial position, their legal position, their workflow, their reputational risk, etc.
Contractors need to make themselves an integral part of this process to achieve the best possible outcome. They need to press their case and tighten up evidence to support their position if they are to avoid a blanket assessment as being Inside IR35 with the resulting reduction in take home pay.
As a first step, all private sector contractors should obtain their own independent IR35 assessment. Once determined, they should then enter into discussions with their agency and or end client to agree the contractual and financial position going forward. As the reforms are aimed at increasing tax receipts to the government, it’s vital that all parties in the contractual supply chain review and agree terms.
Is this the end of Limited company Contractors?
For those genuinely Outside IR35, there may still be financial advantages to operating a limited company.
However, for the majority who end up Inside IR35, there will be no financial advantage in keeping a limited company operating. We are likely to see a lot of contractors closing their companies and moving to Umbrellas or Agency payroll.
Changes to Allowances and Reliefs
On a more positive note, the Chancellor did bring forward an increase to basic and higher rate thresholds, £12,500 and £50,000 respectively.
An individual earning £50,000 will now pay £860 less tax.
What the Chancellor didn’t shout about however is that National Insurance income bands are changing as well, resulting in more income be subjected to Class 1 deductions at 12%.
The same person earning £50,000 will now pay £340 more in National Insurance, making the overall gain in annual take home £520.
Pension Tax Relief remains untouched at £40,000 per annum for most tax payers.
Contributing to a company or personal pension remains one of best ways of lowering the amount of tax payable.
How can the Contractor Co-op help?
The Contractor Co-op is ready and willing to help contractors understand their IR35 Status and plan for the reforms, to include:
obtaining an independent IR35 Assessment
working will all parties in the supply chain to negotiate the best outcome for the Contractor
guidance on closing a limited company
a transparent and safe means of contracting through its Umbrella payroll service
If you have any questions or would like to talk to us about becoming a member of the Contractor Co-op please get in touch. Either call us on 020 3468 0009 where we can talk through your individual situation or send us a message to info@contractor.coop.