The story so far…
IR35 has been around since 2000. It aimed to catch people who were claiming to be self-employed when their duties were more like employees.
Under the current legislation, the onus is on the contractor to assess each assignment and decide if they are Inside IR35 or Outside IR35.
Inside IR35 – The duties for that assignment are more like an employee
Money earned on that assignment should only be paid out via PAYE
Outside – The duties for that assignment are more like a self-employed person
Money earned on that assignment can be paid out via both PAYE and dividends
HMRC struggled to enforce the rules, as they had to bring about cases against individual companies and prove that their duties were more like an employee. As there is so much grey area when deciding whether an assignment Inside IR35 vs Outside IR35, they lost as many as they won.
Understandably, they decided that their best option was to move the goalposts.
In 2017, they introduced the off-payroll legislation into the public sector. This same legislation was due to be rolled out into the private sector in April 2020 but the pandemic bought contractors some brief respite when it was delayed for 12 months.
Since then, the legislation has received Royal Assent. This means that it will definitely be going in to law in April 2021.
If you operate through a Personal Service Company (PSC)/Limited Company then it is essential that you read on. If you are paid via PAYE (such as an umbrella company), this does not apply to you.
What are the changes?
From April 2021, responsibility for assessing the IR35 status of a given assignment will fall to the client receiving your services, providing that they aren’t classed as Small businesses. They are usually known as the end client.
Small Business Exemption
To classify as a small business, the client must meet two of the following three criteria:
- Turnover – not more than £10.2 million
- Balance sheet total – not more than 5.1 million
- Number of employees – no more than 50
If this applies, you will be responsible for assessing your own IR35 status for that assignment. It is imperative that you get it right, however as the potential liabilities could be huge.
All other business
Most clients will use the HMRC Check Employment Status for Tax (CEST) tool to determine your status.
If the determination says that the assignment is Outside IR35, nothing needs to change. Your company can continue to operate in the same way for that assignment.
If the client determines that the assignment is Inside IR35 however, this makes a big difference.
How will the IR35 changes impact me?
Your agency will pay your company a deemed payment (assignment rate x hours or days) less income tax (PAYE) and employees NI. Don’t be fooled, however. You won’t receive any of the protections or statutory benefits of employment, but you will be taxed in the same way.
The agency will also have to calculate and pay employers NI and the apprenticeship levy based on the deemed payment. This will be a huge increase in cost for the agency, so rather than reducing their margin, they are likely to reduce your rate so that they aren’t out of pocket.
As your company has received income for the assignment with tax and NI already deducted, you won’t be able to offset business expenses against this cost, nor will you be able to maximise your pension contributions.
You will still have to pay accountants fees, get business insurances, complete a self-assessment, be responsible for your own administration, credit control and all other responsibilities and duties of running a company.
In other words, you will have the costs of running a company, the risk of running a company and the inconvenience of running a company, with the income of an employee, but with none of the perks.
It is the worst of all worlds.
What should I do?
If you work through an umbrella company, you will likely be paid more than through your own company operating inside IR35. You will also receive all of the benefits of being an employee and any other benefits that the umbrella company offers.
We are offering huge discounts to contractors moving to umbrella from their own limited company.
Click here to request some more information.