Important IR35 Changes Affecting UK Contractors In 2020
IR35 is the short form of a tax legislation of the United Kingdom. It stands for “intermediaries legislation”. As the name suggests, it is related to dealing with intermediaries when you work as a contractor in the United Kingdom.
Now, there is a lot of issues connected to something which sounds as simple as a contractor who finds work through an intermediary source. There are certain tax rules and rules of engagement which will be applicable for someone who is pursuing contracting work as a limited company.
There are some hefty fines and penalties if you are found to be in breach of the IR35 legislation. Simply stated, you can be liable pay up to 25% more in taxes each year!
So, you want to find out exactly what is IR35 and all things related to it, if you are a contractor in the United Kingdom, and if not, then you want to stay as far away as possible from it.
But how can you stay away from it, if you don’t know what it is?
The Emergence of IR35 & Its Definition in Current Circumstances
IR35 has been in effect since over 20 years ago. IR35 was first introduced in 1999, and since then it has taken a lot of criticism due to the poor conception of taxing in it. Experts in the industry have blamed it to be implemented unfairly by the HMRC as well.
Over the course of the years, there has been adjustments made to the IR35 however, it continues to be an unnecessary financial burden to small businesses. Even in the recently completed elections, the review of the current IR35 tax has been one of the primary topics.
So, What Is The IR35 Off-Payroll Working Legislation By HMRC?
IR35 is a legislation which grants HMRC the power to collect additional tax payments where an independent contractor is working as an employee, but is not truly an employee.
So, when an independent contract worker sets himself up as a limited company and works for a client, then they share the traits of an employee to their client, as a result they are found to be within the legislations of IR35.
The factor of determining whether or not IR35 is applicable varies in the public sector vs the private sector.
In the public sector:
The client of the independent contractor is responsible for determining whether or not IR35 is applicable. If they are, then the client must place the independent contractor on a payroll and deduct taxes and national insurance contributions from their earnings.
In the private sector:
The client of the independent contractor is required to make the extra payments to HMRC to make up for the tax and national insurance contributions of the contractor according to their earnings.
However, it is important to make clear that now with the elections finalised, the IR35 tax system is due to change from April 2020. In the meantime, additional reform may be placed in respect of the hardships IR35 has caused to many clients.
In general understanding, an individual is not said to be “in breach of IR35” rather, the contracts of work of such individuals are described as being “within IR35” or “caught by IR35”.
How Can You Determine Your IR35 Status?
First of all, determining IR35 status is not a simple task at all!
As independent contractors work with various clients in numerous types of contract agreements, the IR35 circumstance may vary from one client to another, or even from one project to another.
HMRC is also responsible for considering multiple factors to determine IR35 violation such as the following:
- Is there a need for the independent contractor to do all work themselves?
- Can a substitute worker be sent on behalf of the independent contractor?
- Is the independent contractor liable to do all requested work for the client?
- Is there a certain list of things that is defined by the client for the contractor to do?
- Can the client control how much work is done? When it is done? Where it is done?
Answers to these questions will determine the client and contractor’s employment relationship. Additionally, HMRC’s online tool is suggested be used by contractors and clients in an effort to understand or help for determining IR35.
It is important to understand that, regardless of what is stated in the contractual agreement between the parties, HMRC will still be able to consider the practical application of the contracted agreement.
HMRC Guidance on IR35 to Understand Off-payroll Work
HM Revenue & Customs offers a lot of information to guide not just UK contractors about off-payroll working, but also for clients, workers and any entity which they use as intermediaries.
IR35 Rules of Conduct
It must be clear to understand by now that IR35 or off-payroll working rules are applicable for a contractor or freelancer when they are providing their specialised services using an intermediary.
The intermediary can be your own limited company if you are UK contractor, or a client, a partnering service provider or just another individual.
The IR35 rules are in place to ensure that contractors or freelancers do not get tax relief or other benefits which would otherwise be payable as a normal employee. So, this is directly related to the legislation of HMRC collecting the same taxes and National Insurance contributions from general employees.
So, as a recap, you will be affected by these IR35 rules if you are of the following:
- a worker who provides their services through their intermediary
- a client who receives services from a worker through their intermediary
- an agency providing workers’ services through their intermediary
If these above mentioned IR35 rules are applicable to you and/or any individual, then the remaining tax and National Insurance contributions must be paid on the earnings to HMRC.
You can use the HMRC’s Check Employment Status service provided on the official government website to better understand and also find out if IR35 rules apply to your unique situation.
IR35 Off-payroll Rules Before 6 April 2020
As a contract worker in the private or the public sector, it is not your own responsibility to determine your IR35 eligibility.
In case your client is a public sector company, they must inform you of their findings about your employment status.
In case your client is in the private sector company, it is the intermediary’s responsibility to inform you of your employment status for each contract.
IR35 Off-payroll Rules From 6 April 2020
Now, IR35 rules will be going through a change starting from 6 April 2020. While there are more changes expected after the IR35 Tax Review by the newly elected UK government, for now the following changes will occur:
- Both public companies and medium to large private companies will decide the employment status or the IR35 eligibility for workers
- For workers who do contract worker for smaller clients, their intermediary whether it is an umbrella company or a recruitment agency, will decide IR35
Important Facts About IR35:
Introduced in April 2000
Reformed in April 2017
Scheduled for changes in April 2020
Penalty currently set at 25% more in tax & National Insurance contributions
Employment Status checking is complex
Best to seek expert advice
Now, for those who are professional contractors in the United Kingdom, or even a freelancer, consultant, etc. who works as a limited company, you should not be afraid of IR35 rules. You just need to be well aware of how the IR35 legislation works and IR35 best practices.
If for any reason you doubt something, be prepared with proof for your defence if you are investigated by the HMRC for IR35.
If you are not too sure after using IR35 calculators, then fill in a form and speak to one of our experts to find out more.
No matter what you do, do not ignore your IR35 assessment as it is better to spend some time, effort and even money to determine your status, rather than being penalised by HMRC for IR35.
A Tory Win For UK Elections: What It Means For IR35
Conservative Party candidate, Boris Johnson won a deciding majority after the general elections in UK. Of course, the news has been packed with all the things that is to be expected by this government over the course of the next four years.
From polling and studies, and even the results, it is safe to say that a majority of the over 5 million self-employed individuals in the UK contributed towards the Tory win. So, as contract workers what is expected in terms Johnson’s government and the IR35?
We take a detailed look into this critical concern for contractors in the UK.
The Conservative Government’s Promise of An IR35 Review
During the campaign, in an unexpected turn of events the Tories promised a review of the much criticised IR35 rules for UK contractors. Although the reputation of the party somewhat suffered, as they have traditionally been known as a business party.
This happened in an extent due to growing pressures from other parties such as LibDems and Labour who pledged to review IR35. So, in an effort to gain or retain support from contractors, the Conservatives deemed to make promises regarding the IR35 off-payroll rules.
Sajid Javid Announced The IR35 Review
2020, there would be appropriate measures taken. Now, whether or not this was said to simply secure votes or to actually offer an IR35 reform will be discovered soon as there are just a few months before the rollout.
The chancellor was pressed for answers regarding the government’s commitment to IR35 by asking if the IR35 off-payroll rules can be removed as a legislation. He responded by saying that a wider investigation into the IR35 matter will be conducted to discover any faults to help contractors and freelancers with a revised IR35 policy.
He is quoted to say the following:
“One thing, in particular, I want to look at is the proposed changes to IR35, these are the tax rules that apply to many self-employed people, particularly those that work as consultants. I want to make sure that the proposed changes are right to take forward so we will be having a review of those proposals and changes as part of our wider self-employment review.”
Can the IR35 Review Be Completed on Time by The New Tory Government?
The votes were retained from contractors amongst other self-employed individuals and the election won, but how likely is it that the IR35 rules will be reviewed on time before the soon to approach deadline for the new rollout of IR35 on the 6th of April 2020.
To review the IR35 rules, significant calls must be made in terms of the planning, communication, and a fair amount of time to execute those plans. With each passing day as the deadline approaches, contractors stand to lose more as well as businesses that work with contractors, freelancers, consultants and other types of self-employed individuals.
The current reform of the IR35 was set in 2018 and is finally set to be applied on April 2020. But if this newly promised IR35 legislative review is to take place, then it needs to be completed before the 6th of April 2020 date, to avoid any further issues.
Brexit by Boris & How It Will Affect UK Contractors Concerned with IR35 Rules
Another issue will arise with the actual rollout of the Brexit deal as it is finalised by the newly elected Boris government. Either way with a hard Brexit or not, UK contractors will be impacted and we can only find out what will in the future.
Data suggests that almost 45,000 contractors that live in the UK and pay taxes are actually working for long-term contracts with clients in the European Union. Depending on the terms of Brexit, they may or may not be eligible to continue working as UK contractors in the EU.
A transition period will be a must to ensure that both clients and contractors are able to make suitable arrangements through mutual agreement. IR35 rules, taxes, national insurance contributions etc. will all be under the scanner as these events occur.
But a hard Brexit without any consideration will affect contractors and clients with devastation in terms of earnings, and arrangement for future work in the UK.
Contract Work Demands May Increase
In the United Kingdom, self-employed individuals such as contractors, freelancers, etc. have contributed up to £300 billion into the economy over the last 12 months. The demand of contract work, IR35 rules and eligibility demands are likely to experience a massive rise in the market.
Big companies may or may not be ready to invest heavily on permanent employees and will pursue contract workers. As a result, the IR35 rules will become even more important with increasing demands for contractors in the post-Brexit United Kingdom.
At the end of it all, it is simply a case of just wait-and-see!
The number of contractors and self-employment has increased recently in each year, so despite Brexit and IR35 reforms, they are likely to continue to increase.
Our Solution For You To Deal With IR35 Off-Payroll Issues
Do not ever think about ignoring IR35 issues, as they will resurface with vengeance. Here is our solution for you to deal with IR35.
IR35 is nothing short of being controversial, and this controversial IR35 tax is set to go through changes to come into effect from April 2020. IR35 tax is affecting both contractors and the businesses that hire them with some serious repercussions.
However, with appropriate measures taken the risk of falling into the IR35 trap can be avoided.
The major change that we can understand from the current plans is that employers of the private sector who work with contractors, will have to abide by the same IR35 rules as companies in the public sector. As result, as per the IR35 legislation both UK contractors and small businesses will not be too excited about the changes.
The off-payroll working rules known as IR35 is more popularly nicknamed as contractor tax. It prevents independent contractors or self-employed individuals in the UK from claiming self-employments tax benefits, if their contract works falls within the definition of normal employees.
So, for those individuals they will be liable to make additional tax payments to make up for the deduction in their tax contributions.
The IR35 was introduced by Gordon Brown in an effort to persuade employees from tax avoidance. However, the lucrative option of working as a contractor rather than an employee made many to abuse the IR35 legislation. As a result, HMRC had to disagree with a lot of contract agreements to be deemed as contractors rather than employment.
So, from April of next year, private sector businesses will have to be responsible for appropriately dealing with the contractors they employ in accordance to IR35 rules.
As a result, business in the private sector will have to take one of the following two crucial decisions keeping in mind the IR35 legislation:
- Contractors – if they employ contractors, then they will have to make sure that their contract workers fit the definition of HMRC for being a contractor. If found to be otherwise, then they will face hefty fines from HMRC as per IR35
- Employees – if they hire the contractors as employees, they will have to provide these new workers the same benefits as other standard employees which will come at an additional costs and responsibilities, but IR35 will not be a concern.
For contractors working in the United Kingdom, the challenge is also great. Those genuine contractors will either be taking an unfair tax hit due to IR35 rules, or they will stand to lose their contracts to those who are willing to be employees of a client.
As a result, the career of genuine contractors in the UK will be at somewhat of a risk due to IR35.
Why HMRC Has Implemented This Harsh IR35 Legislation
The reason for IR35 legislation was simple – employees are treated differently from contractors or contract workers.
An employee receives the following benefits from their employer, if not more:
- Pension contributions from employers
- Paid holidays
- Sick pay
- Expenses & other benefits, etc.
A contractor for their work receives just one thing from the client:
- Flat service fees
In addition to this, contractors can be dismissed without any notice if the client is unable to provide any more work. Now, you may think that why would someone wan to operate as a contractor.
Majority of contractors operate by setting themselves up as a limited company. They can choose to do so as a one-man company, or a “umbrella” company. Contractors do not work as sole traders as it is highly risky. So, working as a limited company, contractors can be liable to pay less tax.
But a limited company contractor can work in a similar way as a normal employee while still getting those tax cuts. This is why IR35 legislation was introduced. So, HMRC use a simple test to determine initial employment status identification: if a contractor has similar obligations like an employee, then they should be paying taxes similar to normal employees as well.
This is why HMRC has to look closely at what they call “personal service companies”.
What Is Known as a “personal service companies” to HMRC?
It may sound dodgy, but it is in fact a simple company under which contractors, freelancers or self-employed individuals can operate. Which is of course a limited company. But the distinction between a limited company and a personal service company (PSC) is that some contractors are not genuine and they use it as a cover for their employment to avoid paying more in taxes.
Due to the expected IR35 changes to come in 2020, it is not good news for either contractors or companies. Companies will fear to hire contractors only for the HMRC to catch them under IR35 and be forced to pay penalties. Also, genuine contractors will not get clients due to the potential risks involved.
How To Check Your IR35 Employment Status?
HMRC has a free online tool which can be used to check your employment status.
The tool is called Check Employment Status for Tax (CEST)!
You can use this as a guide to determine your status however, it is not necessarily 100% accurate. that you can use to give yourself a general guide to your status. The IPSE or the Association of Independent Professionals and the Self-Employed and other industry organisations do not support the use of it since it is not a final determinant of IR35 status.
The Problems with Using Check Employment Status for Tax (CEST) for IR35!
The biggest problem or lacking of the CEST tool is the “Mutuality of Obligation (MoO)” factor for IR35. Mutuality of Obligation in IR35 tax status is crucial. Being an employee of a company is not a singular relationship, it is between the employee and the employer. So, it must be something which is mutually decided.
As a contractor, there is no need for Mutuality of Obligation. They can get a client, and use an associate to conduct that contract work. The client is also not obligated to offer any further work or any benefits of any sorts.
Mutuality of Obligation (MoO) has been one of the most discussed topics in the IR35 tribunals making the CEST tool only a guide not a determinant of IR35 employment status.
What Contractors & Businesses Should Do About IR35?
When you consider the facts, the fear of IR35 is exaggerated and there are actually calculated steps you can take to ensure that you’re not found foul of IR35.
Also, you can never be completely in or out of IR35 legislation. Because it is not the individual contractor or business that is applied to IR35 rather, it is the role or the contractual agreement.
You may be out of IR35 in one contract work, but in the next one you still need to make sure that you do not fall within it. So, we have devised a list of tips to make sure that you can prove to HMRC that you are “in business on your own account” to be outside of IR35 legislation.
IR35 Tips To Prove HMRC Of Being A Genuine Contractor
So, for self-employed individuals working as a contractor under your own limited company or even an umbrella company, you will be able provide evidence to HMRC in the following ways:
1. Highlight Difference Between Normal Employment & Your Contractual Agreement
As a genuine contractor in the UK, your contractual agreement should not mimic normal terms of employment. For example, you will not receive pension or other benefits from client, you will not have pre-set working conditions, you will do your own work and client does not have to provide you with work. You can say no to a certain job, you are not obligated to do everything as told by client.
2. Keep Track of Your Client Communication
If you are using emails, messages, etc. as correspondence, then save them and be ready to provide them to HMRC as proof of your contracting work.
3. Select A Company Name
As a limited company, do not use your own name. Must differentiate yourself from your company, by giving it a name which is different to your name. As a company, you can assign work to be completed by another person, etc. Normal employees cannot pass over tasks to someone else, they are responsible for fulfilling their job role and tasks.
4. Market Your Company
You should invest and keep proof or demonstrate your efforts of trying to find contract work using your company. This means using things like a website, business emails, flyers, business cards, etc. Establish your own brand rather than a client or anyone else.
5. Your Own Office
As a limited company, if you have a well-equipped office even if it in your home, then you will have a stronger basis than just having to work without any organisation. Have an office room, or an office space or even an office computer. Invest in professional licenses, certifications, memberships, etc.
6. Consider Business Insurance Amongst Other Business Services
You should consider getting business insurance such as PI or Professional Indemnity insurance. Also, you should use a business accounts, business phone lines, business banking, etc. All of these will help you to prove to HMRC that you are in fact a contractor and not an employee.
You should consider everything spent on your business as an investment. Keep track of your finances as you invest in your company. This is what will differentiate you from being an employee.
7. Work For Multiple Clients
As a contractor, this is not something that you have the luxury of choosing, however it is best practice to work for several clients. Do not stick one or two clients and always work for them, as this puts you in the grey shades of IR35 legislation by the HMRC’s definition. Your business earnings should come from multiple clients rather than a majority coming from a single client.
IR35 Tips For Businesses
As a business, you should be aware of all the changes that are occurring with IR35. You must review your relationship with every contractor for each job as any one of a particular contract work could fall within IR35 rules.
From April 2020, as it stands now, you as a private business will be fully responsible for determining the employment status of a contractor or your employee for IR35 legislation. You will then have to issue a Status Determination Statement. This statement will make it clear to your contractors whether or not they are within the IR35 legislation.
If you are found in violation of any of this, you will face a hefty fine under IR35 legislation.
So, as a business owner who will have to work with both traditional employees, and self-employed individuals such as freelancers, contractors, etc. you should be very careful.
As a quick review of guidelines, the following are things that you should be doing to make sure that IR35 does not affect you and your business:
- Conduct a fair and thorough review of your work nature and relationship with contractors and/or consultants, etc.
- Be sure to have a clearly stated contract of work agreement keeping in mind the clear and accurate requirements of the IR35 legislation along with other legalities
- Under any circumstance, do not delay from providing the Status Determination Statement for all your employees who work as a contractor or freelancer
- If you have certain contractors that fall under the IR35 laws, then offer them to become employees or come to a mutually beneficial solution and avoid any trouble with IR35
What About Employment Rights For Contractors?
There will contractors that will demand full-scale employee benefits and if you want to continue working with that contractor as your employee, then you must give them those benefits or belikely to face charges that fall within IR35.
However, genuine contractors do not have to be treated as employees. Be sure to consult a specialist so that you can face all IR35 issues with confidence.
Each case or each contract is unique and needs case by case IR35 Evaluation!
Let’s Have A Quick Review Of IR35 Things We Covered:
We have covered not only what the IR35 legislation is but also it emerged and the current definition of IR35 for UK contractors, both in the public sector and the private sector.
We have also looked at how to determine IR35 status using not just online tools, but also, HMRC’s own CEST tool and their guidance on IR35. A crucial aspect we covered was how IR35 Off-payroll Rules are right now before 6 April 2020 and how the same IR35 Off-payroll Rules will change from 6 April 2020.
Along with important facts that are must know for IR35, we looked at the win for the Conservatory government in the recently completed UK elections means for contractors due to IR35. Also, whether or not the Conservative Government will deliver on their promise of a review of the IR35.
Additionally, how the Brexit plans by Boris will impact contractors concerned with IR35 both in the UK and the EU. We offered you the best solution from our understanding and the current events surrounding IR35 Off-Payroll working rules.
We got to the bottom of why this harsh IR35 legislation was implemented by HMRC. But we also told you exactly how both contractors & businesses should deal with IR35 with some of detailed tips and tricks associated with proving to HMRC that you are a genuine contractor.
Final Thoughts on IR35 Off-Payroll Working Rules in UK
We have thoroughly covered all things that are related to IR35 in this fully comprehensive guide on IR35. While preparing and writing this blog, I referred to this as the IR35 Big Blog – and that is exactly what this is!
So, now you know more than you did before about what exactly is IR35 and how it may affect you.
As a self-employed individual in the United Kingdom, if you are looking to continue working as a contractor then this will help you to understand the IR35 legislation and stay as far away as possible from any potential penalties by HMRC.
Make sure that you seek advice from an accountant regarding all your IR35 concerns whether you are a business or a contractor.
Do not risk having to pay extra in taxes due to neglect or ignorance.
Visit Comparison Contractor for more information that will help you to work as a contractor in the United Kingdom.