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.
Firstly the idea of being your own boss is a powerful one. It’s not for everyone to be sure, but if you ultimately like calling the shots for yourself then it makes sense to go ahead and do it.
Also some contractors work in industries where it is hard to find a regular company that would employ them so they have to form their own company in order to pursue their dream career and fill the niche they’ve successfully identified.
The second reason is that because contractors tend to be more entrepreneurial by nature, the inherent flexibility of their status is a great benefit.
Sadly, like all businesses, it can come with its own challenges including proving that they are actually independent contractors and not “disguised employees”.
This was the focus of Off-Payroll legislation aimed at making public sector recruiters responsible for assessing and vetting the true status of contractors working on their projects.
Brought in to help address tax avoidance, it has also caused a lot of worry and stress and ultimately led to many contractors to avoid working on public sector projects altogether to avoid uncertainty and doubt.
Sadly for them, the changes are due to be imposed on private sector employers too, so the dilemma will arise once again for contractors.
Many will have considered whether it’s worth all the hassle and expense of proving their employment independence and looking for a payroll job instead.
Covid-19 changed a lot of these calculations.
The IR35 or “Off-Payroll” legislation is due to be reinstated in April after being postponed for a year and many contractors who have been lucky enough to continue working and earning during the lockdown period will now find their roles and earnings coming under scrutiny in the near future.
The threat of IR35 might cause some to permanently look for the security of official PAYE employment or it might tempt others to bite the bullet and move forward with their retirement plans earlier than they would otherwise have wished.
Regardless of their personal circumstances, one final choice remains - what to do about their old company?
Optimistic contractors might want to keep their options open and hold onto the framework to provide them with a means of transitioning back into their previous independent existence when it’s feasible or economically advantageous.
But this could complicate their employment status if it’s queried by HMRC.
There would also be the legal duties of any company director even if they aren’t working for their own business at the moment. It might simply be easier to close their company down and reestablish one when material circumstances change.
So for any contractor facing this dilemma, there is an effective and efficient route that would allow them to tidy up any loose ends.
It could also be lucrative for them too.
We’re talking about a Members’ Voluntary Liquidation (MVL), the easiest and most straightforward way to close any solvent business - contracting or not.
Not every business will qualify for an MVL, however.
The business must be solvent, which means they must be able to reasonably pay their creditors in full within a 12 month period. They also need to have over £25,000 in assets and also have either stopped trading or be about to.
If all of these criteria are met then an MVL is definitely a strong option to consider.
If you act quickly you can also take advantage of Business Asset Disposal Relief (BADR).
BADR, as Entrepreneurs Relief was previously known until April 2020, is the rate of tax paid on the assets of your business as they are realised. It’s significantly lower than the equivalent rate of income tax that would be paid on any assets if they were released as a dividend.
A licensed insolvency practitioner who would oversee your MVL could allow assets to be disposed of as Capital instead, which is usually taxed at either 18% or 28%, but qualifying assets under BADR are taxed at 10% - potentially representing tremendous savings.
Another reason to act quickly to close your company is that there’s a lot of speculation that the Chancellor will be looking to change the rules on BADR in the forthcoming Budget in March making it more difficult to take advantage of - or potentially eliminating it altogether.
So if you’ve been thinking about closing your contracting business - now is the perfect time to pull the trigger and do it.
We’ll arrange a convenient free virtual consultation for you with one of our expert advisors to discuss what you want to do.
Then we can work on a plan together to get there and let you get on with your next employment adventure.
In this piece, we’ll look more closely at what HMRC is looking for when they’re trying to prove if a worker is a genuine contractor or a disguised employee.
Firstly, they can look at a contractor’s tax arrangements at any time and they can look back up to six years of returns to retrospectively claim back higher future income tax and NIC payments accordingly.
Pay up, it’s cold outside...
The HMRC are looking for evidence that will prove if a contract or working arrangement is “within IR35”.
If they’re deemed to be inside IR35 then they’ll be eligible for income tax and NICs. Game Over.
The only derogation here is if the company that hired the worker is in the public or private sector.
If they’re in the public sector then it will be up to the company (or agency if they’ve hired the worker through one) to deduct and pay the appropriate dues.
This will be the same for private sector companies from April 2020 as the law changes to bring parity to both sectors.
Until then it’s up to the worker (or their personal services company (PSC) that’s contracted to do the work) to determine whether or not their contract is inside IR35. If so, then they’ll have to pay all the eligible income tax and NICs to HMRC
“It’s a yes from me” - Judges Criteria
HMRC use many individual data points and pieces of evidence to determine what a workers IR35 status is but there are three main areas that taken together, tend to provide a more definitive guide to status:
They would ask - if the client organisation offers the hired contractor work - are they freely able to reject it or are they obliged to accept?
They’re looking for “no mutuality of obligation” for the contractor. This means that they must be free to work on a project-to-project basis, be able to change employees or terminate a project part way through if necessary.
If they can’t prove they have any of these freedoms then they would likely be found to be in IR35.
HMRC will carefully examine what, if any, direction, control and supervision is directed over the contractor by their client.
They’ll look at how much say they have in how, what, when and where they fulfill the contract and their day-to-day assignments.
Being able to work on a project-by-project basis is another key indicator as to IR35 status, so there shouldn’t be any supervisory or directoral elements in any contract clauses dictating how, when and how they work or if there are any exclusionary or exclusivity clauses.
If there are then this could be a good indicator of being inside IR35.
Possibly the most critical and powerful determiner in the HMRC’s arsenal.
Does the worker or contractor have to carry out the work personally or can they provide a substitute or proxy to work in their place?
If somebody is hired specifically for their own skillset, experience and suitability for a project then it may be difficult to prove genuine employment independence under inquiry.
If they are unable to substitute for themselves then this would indicate employee equivalent status in most cases and a compelling IR35 judgement.
There are other contributing factors that HMRC take into consideration including:
There are also other small but subtle indicators to IR35 status such as whether the contractor has a company email address, do they have a job title that indicates a permanent part of the business structure or their own desk or office within a primary workplace.
HMRC have an online test that can be taken to help provisionally determine status.
It can be taken anonymously and won’t store any information given although the results can be printed out and maintained for record keeping, although it doesn’t provide a binding certificate of independence.
Why both£r?
HMRC stated that in the first year following the reforms alone they raised an additional £550m in income tax and NICs and estimated that non-compliance with IR35 legislation in the private sector sees up to £1.2bn lost to the exchequer by 2022/23.
They say they are acting now to secure future funding.
There have been several high profile examples of contractors winning cases brought by HMRC but there are never any guarantees in the legal system of winning a case.
If you’re a contractor and your asking yourself questions about your status, how to prove it if asked or if you think there could be any confusion then contact us today.
After a free initial consultation with one of our expert advisors we’ll be able to clarify any concerns you might have about your status and advise you on any outstanding HMRC issues you or your company might have now or that might pop up when you least suspect it.
History
In the 1999 budget, the then Chancellor Gordon Brown announced measures to counter large scale tax avoidance through the use of Personal Service Companies (PSC).
A PSC is not strictly defined in law but the government definition is “someone who works through their own limited company” as opposed to someone who’s self-employed and pays Class 2 and 4 NICs.
The Intermediaries Legislation, as IR35 is properly known, was announced on the same day as the budget statement in an innocuously sounding pre-budget press release called Inland Revenue (now HMRC) no.35 “Countering Avoidance in the Provision of Personal Services”.
So the IR in IR35 stands for Inland Revenue and 35 is the press release number. Still with us? Good.
It came into force in the UK in April 2000 and was backdated to begin its commencement from the start of the financial year which was 6 April 2000, which amongst other things makes it an Aries.
It’s since been consolidated into various other acts of Parliament including the Income Tax (Earnings and Pensions) Act 2003; The Statutory Instrument Social Security Contributions (Intermediaries) Regulations 2000, SI 2000/727 and The Finance Act 2017.
The latter act implemented changes in the process that determined the amount of Income Tax and National Insurance Contributions to be deducted from a worker.
Why where they set up?
What began as a fairly niche financial activity finally got the government’s attention in the 90s as more and more companies and contractors started using the PSC loophole.
The main purpose of IR35 was to stop workers from setting up limited companies that they could be paid through, saving on income tax by being paid as an independent contractor while effectively being an employee.
They could do this through taking all of their yearly wages in a single month so they only had to pay one set of NICs rather than paying a regular contribution monthly like most employees.
It was widely known as the “Friday to Monday” scenario.
A worker could technically leave their job on Friday as an employee and return the following Monday doing exactly the same work for the same company but they’re now an independent contractor paid via their personal service company and receiving a dividend as opposed to regular wages.
This lead to an increase of directors paying themselves dividend payments instead of wages, so enjoying a tax rate lower than income tax.
The IR35 press release cited that this arrangement was an anomaly that would be corrected in the budget.
It also announced that HMRC would begin to investigate the contractual arrangements between a worker’s PSC and their client company in order to determine if the worker was actually a “disguised employee” - the term they use to identify PSCs that are actually vehicles for disguised remuneration.
If they positively established that this relationship was disguised then any fee paid to the PSC would be eligible to be taxed as a salary and at a higher rate.
A lot of single-employee limited companies or PSCs operate through specialist external recruitment/supply agencies. These agencies have contractual agreements with client organisations to supply individuals to work on various projects. The agency then finds an appropriate PSC or single employee company to supply their services.
The responsibility for determining whether or not a contract is “within IR35” and therefore eligible for income tax and NICs and deducting the appropriate rates depends on whether the hiring client is in the public or private sector.
If they’re in the public sector then the responsibility lies with the client or agency who pays the PSC. If they’re deemed to be inside IR35 then they will also have to pay any and all dues to HMRC.
At the moment the private sector has a different approach, at least until April 2020 when the law changes to make it more coherent with the public sector.
Until then it’s the responsibility of the PSC contracted to do the work to determine whether their contract is inside IR35. If this is the case, they’ll have to pay all eligible income tax and NICs to HMRC.
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In the next article we’ll look at the actual advantages and disadvantages of IR35 and what criteria HMRC look for when they try to establish the status of a contractor.
