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.