16th September 2020
As the date of the private sector IR35 reform in April 2021 (postponed to this date in March 2020) draws closer, some contractors are already being asked to seek alternative arrangements to their limited companies.
Let’s have a look at some of the most common questions our clients asked us about how the change might affect their business:
WHAT IS IR35 AND WHAT’S CHANGING NEXT YEAR?
HM Revenue and Customs (HMRC) introduced the ‘intermediaries legislation’, which became known as IR35 in the 2000 budget. The legislation was introduced to combat ‘disguised employees’. This refers to an individual who would be treated as an employee were it not for the fact that they provide services via their own personal service company (PSC), and paying less tax in the process.
In 2017 the Government shifted the responsibility of determining the status of contractors to organisations in the public sector.
In 2021 the same reform will be rolled out in the private sector and from this date, medium and large businesses (and similar unincorporated bodies) hiring contractors will be liable to determine their off-payroll worker’s status.
WHY DOES MY CLIENT WANT ME TO OPERATE THROUGH AN UMBRELLA COMPANY?
From April 2021 (as it currently stands) the responsibility of determining the IR35 status of assignments falls to the fee payer, along with any liability from an incorrectly assessed assignment.
Your client, therefore, to mitigate the financial risk from an investigation, are now in the process of reviewing all contractor engagements to ensure that they meet IR35 rules. Contractors, whose assignments fail the test are being asked to change over to an umbrella provider.
WHAT CAN I DO IF I DISAGREE WITH THE DECISION?
Until reform takes place in 2021, you will still be responsible for determining your own IR35 status, and we recommend that you continue assessing your status with contract reviews and look to protect yourself against an enquiry.
Post-April 2021 a “client-led status disagreement process” will allow contractors to present evidence against the determination. The client will have to respond to any dispute within 45 days, with both the decision and reasoning. It must be noted that the process removes a contractor’s ability to appeal via ADR or to a tax tribunal.
HOW DOES AN UMBRELLA COMPANY WORK?
When signing up with an umbrella company, you become one of its employees with it acting as an intermediary between you and your agency, or directly with your end client if no agency is involved. As an employee, you will receive a full overarching employment contract and have full employment rights like any other worker. You can find out more from our sister company SmartWork by clicking here.
WHAT HAPPENS IF I CONTINUE CONTRACTING VIA MY LIMITED COMPANY?
Turnover from the assignment inside IR35 will be taxed at source just like a salary. If you have income from another contract that is outside, that will be accounted for as usual. Your accountant will take care of the split when preparing your accounts. Essentially, you will be paying more tax.
WILL I HAVE TO CLOSE MY COMPANY WHILE WORKING THROUGH AN UMBRELLA COMPANY?
Not at all, our recommendation is to keep it dormant so you can instantly engage a contract outside IR35 should one come your way. Costs of maintaining a dormant limited company are minimal and often more cost-effective than closing it down. Our dual service option was created for precisely this scenario.
IS IT POSSIBLE TO CLAIM EXPENSES INSIDE IR35?
Limited Company – Well, if you work inside IR35 through your limited company, the expenses you can claim are considerably lower, the main reason is that travel and subsistence can’t be put through the company.
If you are asked to visit a site away from your regular place of work, keep your receipts, and you will be able to claim tax relief via personal tax return at the end of the tax year. Travel and subsistence related to your usual place of work can’t be claimed.
The main benefit of claiming business expenses is to reduce the profits subject to Corporation tax. Inside IR35 income is exempt from corporation tax, so there is little benefit claiming expenses unless you have accumulated reserves to fund these. If you don’t have accumulated reserves, the expenses will come off your net salary, lowering your take-home pay further.
Umbrella – Working via an umbrella company, the rules are different. As of 6th April 2016, umbrella employees cannot offset their full range of expenses if they are deemed to be under supervision, direction or control (SDC). Before you start your assignment, most umbrella companies help with the assessment of your assignment to determine whether travel expenses will have tax relief applied to them or not.
Where there is no SDC, expenses can be claimed. Please visit the SmartWork expenses guide for a full list of what these are.
IS THIS THE END OF LIMITED COMPANY CONTRACTING?
Certainly not. You can still operate through your limited company and trade inside IR35, or even work on different assignments, one inside and one outside as the IR35 status is based on the individual contract.
Assignments that are genuinely outside IR35 should remain in place without change. This will, let’s not forget, benefit the end client as well, so we are hopeful that this will, in fact, be the case. There are now sophisticated tools available for clients and recruiters to assess contracts.
And let’s not forget companies with a turnover of less than £10.2M not affected by the reform. Contracts signed with these firms will still be self-assessed by the contractor as before.
WHERE CAN I FOND OUT MORE?
We have a dedicated page on our website with more information on IR35 and details on how we can assist you with any queries, along with details of our affiliate partner IR35 expert QDOS Contractor, who offer an exclusive discount on their insurance policies for MyAccountant clients.
We hope you’ll find this article helpful in answering some of your questions. If you’d like to get in touch with SmartWork, please feel free to call them on 0800 434 6446 or send an e-mail to firstname.lastname@example.org.