IR35 tax rules will ring the changes for contractors
The off-payroll working rules or IR35 were first reviewed in 2019 and were due to be implemented last year but were postponed for 12 months due to the Covid-19 pandemic.
Previously freelance workers who operated through their own personal service companies (PSC) determined their own employment and tax status but now responsibility for this decision has shifted to the company engaging their services instead.
Genuine freelance workers could now face higher tax payments and companies could face bigger bills from having to employ more staff directly with the higher associated costs.
We’ve previously written that the aim of the IR35 rule changes are to ensure that workers who would normally be classed as direct employees of a company, essentially doing the same job or the equivalent of other employees pay the same income tax and NICs as their co-workers.
A contractor working under their own PSC then would usually be paying less than an employee directly hired by the business to do the same job.
In a report to the House of Lords from the Economic Affairs Finance Bill sub-committee last year, they highlighted that some companies, especially in the oil sector, had imposed blanket status determinations on workers with some deciding not to use freelance contractors at all to ensure IR35 compliance.
The report also surmised that some workers could find themselves with the worst of both worlds – they would have none of the rights of an employee and none of the tax benefits of being self employed.
Andy Chamberlain, Director of Policy at IPSE, the Association of Independent Professionals and the self employed criticised the timing and the overall complexity of the changes.
He said: “The crucial problem with IR35 is still its complexity. In fact, it is so complex that HMRC have lost the majority of tribunals on its own legislation.
“Now the changes to IR35 are shifting this complexity from contractors themselves onto their clients. The result is clear: chaos.
“Many clients are pushing all their contractors inside IR35 – against the rules of the legislation. Many more are only engaging contractors through umbrella companies, while others are scrapping their contractor workforces altogether – just when, as the economy opens up, they will need them most.”
IPSE research found that 50% of freelance workers were planning to stop contracting in the UK altogether unless they found contracts unaffected by IR35.
Of these – 24% planned to seek contract work abroad, 12% said they would stop work altogether, 11% said they would bring forward plans to retire while 17% would seek a full time employed role instead.
The implementation of IR35 comes at a particularly difficult time for the freelance and self employed sector. According to the latest ONS employment figures, one in eight freelance workers – 660,000 – had left the sector in the last year.
These latest changes could see what is already a torrent turn into a flood.
Depending on their individual circumstances, contractors will have different options to choose from when it comes to tidying up their affairs.
A freelancer who’s personal service company has made a profit and can repay their debts within a 12-month period would be eligible to close their PSC through a Members Voluntary Liquidation (MVL).
An MVL offers several advantages than other methods to effectively close down your company.
It’s generally quicker, more straightforward, can be beneficial for certain taxes and generally less expensive than other methods.
Any business that would be unable to pay off debts within a year or has no clear path to repayment should consider a Creditors Voluntary Liquidation (CVL) instead.
This is a formal process overseen by a licensed insolvency practitioner who would take over negotiations with creditors and look to settle all outstanding loans and debts including Bounce Back Loans along with any HMRC debt.
Being self employed or freelance is a balancing act at the best of times.
In exchange for the flexibility and tax advantages, you forego the certainty of a regular wage and the rights and security of being an employee.
Most of the time the scales will tip in your favour but the IR35 changes compound an already complicated and changing environment.
You might be forgiven for thinking that now you’re being asked to incorporate a juggling routine into your balancing act!
If you’re a contractor with a personal services company or are generally concerned about what the changes could mean for your career and future livelihood then you should get in touch with us today.
We offer a free initial consultation with an expert advisor who can clarify any concerns about your status and will be able to advise you on any outstanding HMRC issues you or your company has.