IR35 and April 2020 changes

So fair bit of talk recently about IR35 and the proposed changes by the HMRC to close that tax loophole that exists to the benefit of PSC’s – personal service companies. IR35 refers to the UK anti-avoidance tax legislation, which is designed to close the hole exists where self-employed individuals are employed to conduct roles in companies where that role would normally have been conducted by a full-time employee.

The benefit to the self-employed individual is they’re paid on a gross basis into their own limited company. They then can pay themselves through dividends at a lower tax rate and avoid NI. It also benefits the company as they save on NI and pension contributions while having less risk as well from an employment litigation point of view, if they need to for example remove somebody. So not great for the HMRC who often lose substantial amounts through tax revenue.

IR35 sets about to provide guidance on what’s classified as an employee and what would be generally classified as a contractor. So if you’re inside IR35 that means you’re considered for tax purposes as an employee of the end client, therefore, you’ll be subject to PAYE; if you’re outside of IR35 this means that you are operating as a genuine business and therefore outside of IR35.

To be outside of IR35, there’s a number of criteria must meet for example the right substitution; so you must be able to have the option to send somebody else as equally as skilled in your place for the contract if needed; it’s around the levels of control, so a self-employed individual might agree to perform a particular task at a specific time and place but unlikely there’s any other real controls around what they do i.e. not being closely monitored by line manager.

Financial risk – the contractor has their own equipment they indemnify themselves against any losses or damages due to negligence. They are obliged to correct any defective work at their own expense.

Mutuality of obligation – a self-employed individual will do the work they’re being contracted to do and when they finish there’s no further expectation of any further work.

So what’s changing? Well in April 2020 legislation reforms are set to be introduced into the private sector; they’re already in place in the public sector as of April 2017.

This affects all medium to large organisations; they are defined as having an annual turnover of 10.2 million or more or a balance sheet of 5.1 million or more and the proposed change basically shifts the responsibility to assess IR35 from the contractor to the end client.

So this is far easier then to monitor and review for the HMRC.

However, this obviously leaves organisations with the huge task then of assessing their contractor workforce for IR35 compliance and then putting in rigid checking policies in place in order to ensure that they avoid any HMRC fines and back payments of tax excetera, so big job for organisations. For those that are currently self-employed contractors, they’re going to need to review their status and then be prepared then as well to appeal any decision made by the client to simply register them in as inside of IR35.

They may do this to protect their position in the short term, however, it would then mean that individual is then subject to PAYE which they weren’t before.

So if you know anybody needs any further help or support on this then just feel free to drop us a line.

Thank you.