A Guide to IR35 Tax Legislation Changes
In April 2020, IR35 rules change for contractors. This article should provide useful information for both contractors and clients alike, keeping them abreast of the changes and helping to explain the impact they may have on how such parties do business.
What is IR35?
IR35 is a tax reform that affects the way that HMRC views workers who use a Personal Service Company (or PSC) to provide their services.
Also known as the ‘Intermediaries Legislation’ or the ‘off-payroll rules’, IR35 is a rule that applies to contractors. It has been created in order to ensure that workers who do the same job, regardless of how they are paid, all pay a similar level of both national insurance and income tax.
When working arrangements are set in place, a contractor’s assignment is assessed against that of an employee. If the arrangement is deemed to be ‘inside of IR35’ (meaning that there are a number of similarities between them and a PAYE employee), national insurance and income tax deductions must be taken from the pay.
Prior to April 2020, in the private sector, it is the responsibility of a contractor’s personal service company to determine whether the work is either inside or outside of IR35, subsequently calculating tax deductions upon that decision.
In simple terms, IR35 has come about because the Government believes that a significant percentage of contractors are incorrectly assessing and deducting tax, resulting in too little tax revenue making it into HMRC’s coffers.
What will change?
From April 2020, the duty of assessing whether a contractor’s assignment is ‘inside of IR35’ or not, will move from the PSC/umbrella company and to the end-client.
The assessment of tax deduction will also move from the contractor to the organisation who pays the contractor’s limited company, usually an employment agency.
If the end-client is a ‘small company’ and meets any two of the below criteria, however, the change in rules will not apply:
- Not greater than 50 employees
- Equal to or under £10.2 million annual turnover
- A balance sheet with a total equal to or less than £5.1 million
For more information, you can read the full legislation on the Government’s website…
https://www.gov.uk/topic/business-tax/ir35
I’m a contractor, what does this mean for me?
If you are a contractor currently using a personal service company and your work assignment is due to continue past April 2020, the end-client will need to assess whether your arrangement is ‘inside of IR35’ or not. Crucially, they must do this before the rules change in April 2020.
If your assignment is deemed to be ‘inside of IR35’, tax deductions will be taken from your pay. If, however, your assignment is assessed as being ‘outside of IR35’, no tax deductions will be made, and you can continue using your personal service company.
Can I check if my assignment is inside IR35?
The Government have set up a service for contractors who would like to check whether their assignment is ‘inside IR35’, referred to as Check Employment Status for Tax or CEST.
This service has come under a certain amount of scrutiny from lobby groups and industry bodies; however, the Government has pledged to make significant updates to the service and provide more detailed guidance before April 2020.
If you are still uncertain, you can use the Government’s IR35 help service by emailing ir35@hmrc.gov.uk or calling 0300 123 2326. You can also find out more information on their website: https://www.gov.uk/guidance/ir35-find-out-if-it-applies
Regardless of your research, when the rules change, it is the responsibility of the end-client to assess IR35 status. They may decide to use alternative methods or services to help them make the decision.
What if I disagree with the decision?
If you disagree with the decision an end-client has made, you can request a written reason for making the IR35 decision. Under the new rules, the end-client must provide you with this reason and also allow you the right to appeal against the decision.
Further information on how the appeal process will work is expected soon.
We’re here to help!
Prior to and after the new legislation rules, we will be working hard to keep our clients and candidates up to date with new announcements and to ensure that you are prepared for the changes well in advance.
Please don’t hesitate to get in touch with us if you have any questions. We’re here to help!
