The Intermediaries Legislation (IR35) which was first introduced in the early 2000’s, has the purpose to retract tax advantages for individuals who present themselves as a limited business. The aim is to stop the ‘disguised employees’ benefitting from tax advantages that aren’t owed to them. 2019 presents a colossal change for contractors and flexible working in the UK if the government changes Off-Payroll rules in the private sector – likely to be effective from 6 April 2020.
What is off-payroll?
GOV.UK determine Off-Payroll as the working rules to make sure that you pay broadly the same tax and National Insurance contributions (NICs) as an employee if you:
· Provide your services to a client through your own intermediary – commonly a limited company that you own
· Would have been an employee if you were providing your services directly to a client
Previous IR35 changes in 2017
There have been various amendments to these regulations with each successive Government making the same claim that there are too many limited company owners illegitimately working outside of governmental rules. Due to this, new Off-Payroll rules were implemented in April 2017, whereby clients held sole responsibility for determining their IR35 status as opposed to the contractor. So, when a contractor is deemed to be ‘inside’ IR35, the client must then deduct employees’ NIC and income tax from the contractor’s pay, as well as paying employers’ NICs.
However, the tools and data required for the client to make an informed decision for the IR35 tax reforms have been received poorly and critiqued for their ambiguity. In addition, the penalties that are in place for incorrect employment status determination caused some clients to opt to make blanket inside IR35 verdicts.
The 2018 Autumn budget announcement
Last autumn’s budget announcement revealed that there will be further changes to IR35 reforms with the Chancellor broadcasting that Off-Payroll rules will be extended to private sector businesses, not including small business clients of 50 employees or less, as of April 2020.
The negative effects of Off-Payroll will impact individuals of the business supply chain involving contractors, who face the risk of excessive taxation and NIC by hiring firms, which presents the challenge of misguided IR35 assessments. But those who agree to work inside IR35 contracts won’t receive compensation with the employment rights that their status warrants. In addition, the denial of tax relief on expenses will encourage the decrease in workplace flexibility, which in turn will cause contractors to evaluate their costs and benefits of flexible working.
How will IR35 affect me?
As a limited company director, you remain responsible for determining your IR35 status. If you aren’t a limited company director, check in with your client or contractor to make certain that you know who is paying what and who is responsible for what, including if you are inside or outside of the IR35 tax reforms. Clarity is key! We recommend seeking professional IR35 contract status reviews and considering taking out tax investigation insurance.
For contractors entering into yearly contacts after 6th April 2019, reflection and assessment of contracts is important to clarify their position. Parties found to be in a doubtful engagement by HMRC after April 2020 will face significant tax risk.
What happens next?
The Government is expected to submit their draft clauses for the Finance Act 2019 in July. This will then be published along with the Autumn Statement in November – the final decision.
If you are in need of further advice on the IR35 Tax Reforms and have queries on how it will affect you, or if you’d like an assessment on your current status, please contact the LWA Tax team in Warrington on 01925 830 830 or call our Manchester office on 0161 905 1801.