IR35 and the implications
HMRC will apply new rules on IR35 from 6 April 2020, much to the disappointment of those who have campaigned to halt the change.
This potentially covers any contractor who provides a service to a client and who bills for this through a limited company. It will apply to consultants working in both the public and private sectors, and many contractors working in construction because HMRC regards them as 'disguised employees'. The new rules seek to tax the earnings of the contractors’ limited companies as if the consultants were actually employees of their client.
Having admitted in its own review that previous regulation has not been "fully effective”, the government will go forward nonetheless. Meaning, if you have a single large client, then you are at risk: the question of control is the key to determining whether a person is employed or self-employed.
The use of the controversial Employment Status For Tax (CEST) tool, which only worked 85 per cent of the time, may yet be changed, but cannot be relied on to help companies assess whether they fall inside IR35.
Faced by the uncertainty, many large banks have already said they will no longer hire contractors.
But the government has offered contractors a number of concessions:
- Other than in cases of clear deliberate non-compliance, penalties will not be levied for errors relating to off-payroll payments in the first year
- New investigations into Personal Service Companies will not apply to tax years prior to 6 April 2020, unless there is reason to suspect fraud or criminal behaviour
- The government will update the legislation as it is applied to offshore companies, to confirm that it will not apply to contractors working for overseas companies
- They will also place a legal obligation on clients to respond to a request for information about their size from the agency or worker.
Companies willing to continue are now pushing contractors into umbrella companies and PAYE situations, forcing an effective pay cut of up to 30 per cent. Critics have added that being inside IR35 will essentially be "no-rights employment", meaning consultants are paid and taxed similarly to regular employees, but do not qualify for any of the security or protections that go along with permanent employment.
A recent survey by the Association of Independent Professionals and the Self-Employed (IPSE) has said that a third of contractors and consultants plan to leave their client rather than face up to the new regulations. To assess your own best course of action do contact us for independent professional advice on this crucial issue.