How do you know if you’re in or out of IR35?

How do you know if you're in or out of IR35?

Are you in or out? That’s the question most of you contractors will be asking within the next couple of months and interestingly, this question does not relate to Brexit! Here’s what you need to know about IR35 and the impact on your contracting career.

As you are probably aware, changes to IR35 tax legislation are due to roll out in April 2021. The UK Government recently released the draft legislation, which we’ll summarise below. We also invited our contractors to take part in a survey – scroll down for an interesting insight into how contractors are feeling about the changes…

What is IR35?

IR35 is the name given to tax legislation in the Income Tax (Earnings and Pensions) Act 2003. It was originally introduced in 1999 to deal with alleged tax avoidance via the use of Personal Service Companies (PSC’s). IR35 is intended to ensure that contractors who work like employees pay broadly the same employment taxes as actual employees, regardless of the structure under which they provide their services.

What IR35 in the private sector is going to look like:

Currently your PSC (‘Personal Services Company’) needs to declare whether you work inside or outside IR35. HMRC has claimed that only 10% of all PSC’s apply the current IR35 rules (and thus account for PAYE) and have estimated the costs of alleged non-compliance to reach £1.3bn in 2023-24.

The most important change under the proposed legislation will be that the end user (in the staffing industry also known as the hirer or end client), ) client, and not the contractor PSC, is required to make a determination of the contractor’s tax status.

Salt, a global digital recruitment agency has set up an IR35 project group to help both candidates and clients in the digital industry finding their way through this somewhat ambiguous piece of legislation. Email to enquire.

Before the draft legislation was announced, David Korthals, Head of Compliance & Contractor Management, and Richard Norris, Technology Sales Director at Salt already explored the proposed legislation in great detail and outlined how recruiters and clients can work in harmony to overcome some of the challenges that the new legislation presents. You can read their article here.

On 11th July, the government published the draft legislation, and aside from a few minor tweaks this provides no real surprises. Below is a summary of the new legislation:

  • The liability for making the IR 35 determination shifts from the contractor to the end user. The end user provides the status determination (inside or outside IR 35)  and the reasons for the determination to both the contractor and the party they contract with (usually the recruitment company).
  • The end user needs to exercise reasonable care when making the status determination (HMRC announced it will issue further guidance)
  • Contractors can challenge their status determination and the end user   will have to respond to a request for a status determination within 45 days. They can either justify their decision or give a new status determination thereby setting aside their previous determination.
  • If the end user determines the assignment falls within IR35, the fee payer ( the party paying the contractor) is deemed to be the employer for tax purposes and will need to make a ‘deemed employment payment’. This includes responsibility for levying income tax and accounting for (employer’s) NIC’s through the mechanism of PAYE.
  • All of the above will not apply if the end user can be classified as a small business. This means that small organisations will not need to determine the status of the contractors, this would remain with the PSC. For the definition of ‘small business’ the Government intends to use the definition which is outlined in section 382 of the Companies Act 2006. As many end users in the Tech & Digital Industry who rely on contingent workforce will not meet this threshold, we expect that the exception will be of little relevance for Salt and its contractors.

HMRC will revise the CEST tool (this is used as a service to help end users making status determinations) and the enhanced version is expected to be available by the end of 2019.

As many end users in the Tech & Digital Industry who rely on contingent workforce will not meet this threshold, we expect that the exception will be of little relevance. More detailed guidance can be found on the government website. 

So, how will IR35 impact the world of contracting?

Well, according to our recent survey with our contractors, only 7% think it will have a positive impact!

The contractors who took part largely cited concerns over a decrease in their net revenue, another layer of complexity added to an already difficult piece of legislation, and some of them predicted the flexible workforce will be removed completely for short term projects.

The UK Government have outlined that the new rules will only have little impact to already compliant PSC’s and do not have any significant macro-economic impacts. It has also been stated that there will be ongoing savings for around 230,000 PSC’s who will no longer have the requirement for determining status or associated accounting burdens.

The vast majority of contractors who took part in the survey are aware of the new legislation changes (80%) and 22% of them have already had a conversation with their client regarding IR35.

Although there have been widespread fears of clients making blanket determinations post-April 2021, the opinions in our survey appear to be mixed. 55% believes that their client will make the right determination when assessing their tax status post-April 2021 whilst 45% do not believe their status will be determined adequately.

Interestingly, 9% have decided they are likely to stop contracting once the legislation is in place, whilst 32% said they will continue, nonetheless. Some will consider working for an umbrella company (4.5%) or moving abroad (4.5%). However, the vast majority is undecided (45.5%).

Keep your eyes peeled as we’ll soon be releasing information on our London event all on IR35, and in the meantime you can check out our latest Contracting jobs on our website.

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