So what’s the latest with IR35. Read on for our refresher, and an update on where things currently stand.
What is IR35? Lets start with a recap – IR35 is tax legislation to prevent ‘off payroll’ working for contractors/ freelancers providing services through their own limited company, often referred to as a personal service company (PSC).
What does Inside/ Outside IR35 mean? If a contract between a contractor and the company they are providing services to is ‘inside IR35’ or ‘off-payroll working rules’, it means that HMRC think that the contractor should be paying the same taxes as an employee. In their view the contractor is working as if they were an employee – and they want the tax for it!
If your contract is ‘outside IR35’, then you are ok to carry on in the usual contractor/ freelancer arrangement for invoicing and tax purposes. HMRC do not view you as a ‘disguised employee’.
More info in our earlier blog post – here
What changed for IR35 in April 2021? The main change was that the responsibility for deciding who falls inside the scope of IR35 has shifted.
Just for context, before April 2017 the contractor working from a limited company was always responsible for deciding if a contract was inside or outside IR35. The obligation fell on the contractor, together with the tax bill if HMRC didn’t agree.
In April 2017 HMRC changed how things worked in the public sector. The decision around employment status moved away from the contractor providing the services, and across to the client (receiving the services). The public sector employer was responsible for determining the status of the contractor.
6 April 2021 private sector update – Now all medium and large-sized private sector clients will be responsible for deciding the contractor’s employment status (in line with the public sector changes introduced in 2017).
A medium sized company is one which meets two or more of the following:
- Annual turnover of more than £10.2m
- A balance sheet total of more than £5.1m
- More than 50 employees
Employers who fall into this category, will need to provide their decision on status by providing a Status Determination Statement (SDS) to the worker and agency or organisation they contract with.
How will this impact me? If you provide services to medium or large customers, then it’s their responsibility to work out if you fall inside IR35 or not. If your customer is a small company then it’s your responsibility to work out whether you are impacted by IR35, or “inside IR35”.
So if you are contracting for small companies, how can you limit your risk?
Don’t attract HMRC’s attention in the first place – make sure your limited company accounts are submitted on time, and they are correct. Find yourself a good accountant!
Have your contract reviewed – there are Companies like QDOS who will review contracts for IR35 compliance – https://www.qdoscontractor.com/full-ir35-contract-review
Make sure you’re not named in the contract – and make sure you’re operating under a ‘contract for services’ arrangement as a B2B service provider. You can ask your client to provide a ‘confirmation of arrangements’ letter to confirm this if it’s not set out in your contract.
It’s best to try and avoid replacing a full time employee – this will just increase the risk and would be more difficult to justify with HMRC.
Make sure you’re in control – of where you work, when you work, how you work, the equipment you use, how you use it etc.. This will all help show you are not acting in the capacity of an employee.
What if my client is based overseas? Assuming you are subject to UK tax, either because you are resident in the UK or perform your duties here, the responsibility for assessing IR35 status will depend on what connection your client has with the UK. If the client is wholly based overseas with no UK presence (i.e. no branch, office or subsidiary here), you can continue to self-assess your IR35 status. If the client is based overseas but has a connection to the UK, the new rules will apply and the client should provide you with a status determination statement.
What are your options if you are deemed to be inside IR35?
Use an umbrella company – This will act as your employer, and they will make sure that you are making the right payments for PAYE and NIC while you are working inside IR35. It’s a bit like a halfway house between a permanent employee, and a contractor.
Become an employee – If that is an option and it makes sense.
Look for new contracts which are outside IR35 – HMRC view IR35 on a project by project basis, looking at the terms and conditions for each. You will always have options to look elsewhere for other contracts which are not deemed to be inside IR35.
Take out IR35 Insurance – Various options out there covering different scenarios, worth looking at the options.
What happens if HMRC investigate me? The chances are slim but this could potentially happen. Step 1 – HMRC will send a letter to the contractor asking them to justify their IR35 status. You may be asked to provide information on past, present and future contracts. You can request the help of legal representation at this stage – which is recommended!
HMRC may also get in touch with your client. HMRC will then make their decision as to whether you are inside IR35 or not. If you are found to be inside, an assessment is carried out to find out how much tax and national insurance you might owe. They could also add on a penalty if they determine you were intentionally avoiding tax.
Need some advice – Book a call with the PennyBooks team