IR35 changes and what they could mean for you
Posted on 20th September 2019 at 09:23
If you work as a contractor, you might work through an intermediary. This could be a limited company, a partnership, or through your own personal service company.
This is known as off-payroll working. However, if Her Majesty’s Revenue and Customs (HMRC) thinks you are really an employee it can have a big impact on your finances.
What is IR35?
If HMRC decides you are a deemed employee, your net income could be reduced by up to 25% because you will have to pay additional income tax and National Insurance Contributions (NICs).
Tax rules known as IR35 have been in place since 2000 to make sure that, in these circumstances, you pay broadly the same tax and NICs as other employees.
Ever since the introduction of IR35, tax experts have been worried about the costs and difficulties these rules can cause for small businesses.
New off-payroll taxes
In April 2020 the Government will be replacing the original IR35 legislation with a new Off-Payroll Tax for the private sector. This approach is already used in the public sector.
If you have your own business and you are a genuine contractor, freelancer or interim or consultant, IR35 should not apply to you. However, you might still be investigated by HMRC, so here are some things to think about.
How Off-Payroll Tax will change from April 2020
The original IR35 rules were intended to prevent businesses using contractors who were really ‘employees in disguise’. Employers could benefit because they didn’t have to pay employer’s NICs (13.8%), the Apprenticeship Levy (0.5%) or offer any employment rights or benefits.
The new rules mean your status as a contractor must be assessed in advance and, where IR35 applies, employment taxes must be paid in addition to your fees.
Under these new rules, the fees you are paid are called a ‘direct deemed payment’ and are treated as employment income; just like a salary. PAYE and employee’s NICs will be deducted from your ‘deemed salary’. Whoever is paying you, whether it is an agency or the business you are working for, will also have to pay their share of employment taxes, which can’t be deducted from your fees.
The test of employment
The ‘test of employment’ which is used to decide your position has developed in case law over many years. One of the most important cases dates back to 1968.
This means that an HMRC inspector can overrule a written contract between you and your client by looking at the working relationship to decide whether it is really a contract of employment.
If you are a deemed employee, then IR35 applies. If you are providing business to business services, then IR35 does not apply.
There are three important principles:
how much control your client has over how, when and where you work (control)
whether you can send someone else do the work instead of you (substitution)
whether the employer is obliged to offer you work and whether are you obliged to accept it (mutuality).
Things like your contract type, whether you are taking a financial risk, and if you’re an integral part of your client’s organisation can also be considered.
The HMRC has an online tool known as CEST, where you can check your IR35 status. It’s also a good idea to ask an IR35 specialist for advice if you are unsure about your position.
Tagged as: tax return
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