Complying with IR35 is a priority for many contractors and clients, especially in recent years due to the 2017 public sector reform and the proposed 2020 changes.
If you haven’t heard what IR35 is all about, it’s the UK’s anti-avoidance tax legislation that was designed to stop ‘disguised employees’ from paying less tax and National Insurance contributions. However, HMRC determined that the legislation in its current state was ineffective and that there were many contractors who were acting as ‘disguised employees’. This is where the legislation reform comes into play.
What is the private sector?
The private sector is made up of individuals and companies that operate for profit. They’re not government or ‘state-controlled’ and operate for themselves. They can collaborate with the public sector (government-run organisations) with a public-private partnership.
Some examples of private-sector industries that rely on contractors include engineering, construction and IT. In these sectors, there is often a need for workers on a project-by-project basis rather than on a full-time contract due to the nature of the work. Other reasons for the need for contractors could be seasonal peaks or one-off jobs.
The April 2020 private sector IR35 reform
Following in the footsteps of the IR35 public sector reform, the IR35 legislation is due to experience some changes in April 2020. The main change is the shift of legal responsibility from the contractor to the client which means that it will no longer be down to the contractor to determine their own tax status.
Part of the IR35 proposed changes involves communication between the client and the worker. The new rules state that clients from the private sector must directly inform the contractor of their determined IR35 status. This message must also be passed along the supply chain (involving any intermediaries such as agencies) so that every party is aware of the decision.
There will be a status disagreement process brought into play with the 2020 reform. As it will be now down to end-clients to let contractors know if they are ‘inside IR35’ or ‘outside IR35’, contractors will have the ability to appeal the decision.
The effect on clients
There are many organisations which rely solely on contractors in the running of their business and some are concerned about the effects that the IR35 reform could have.
Some contractors will be understandably cautious about their client having the responsibility of their tax status as to be found ‘inside IR35’ can have a serious impact on finances. For this reason, they might decide to become an employee of a business instead or be more cautious on the businesses that they provide services for. This could have an impact on these organisations that rely heavily on contracted services and the full effect may not be realised until the reform is well underway.
Some businesses are considering making their contractors legal employees rather than having to keep on top of IR35 and tax regulations. Although this could save administration time and potential fines if any wrongdoing is found, it’s not entirely necessary. Umbrella companies are one way of making sure that the relationship between a contractor and end client is completely IR35 compliant. If this doesn’t suit some companies, IR35 insurance is available which can protect against any unexpected fines or penalties.
Companies are concerned that these changes could lead to fewer freelancers and contractors being available or willing to be hired on a project-by-project basis. This could be down to these individuals taking on full employment status in order to avoid any potential fines or penalties down to the discrepancies of IR35.
Private sector companies who are hiring contractors may also find that contractors are raising their hourly rate. Depending on the details in the contract, this could be due to the costs incurred with going ‘inside IR35’ or to cover any financial implications caused by getting caught by the tax legislation.
The effect on contractors
The difference between operating ‘inside IR35’ and ‘outside IR35’ is huge. As a contractor, you can see the financial implications of each scenario with an IR35 calculator. It can seriously affect the amount of take-home pay you receive as you will be taxed as an employer rather than a limited company. For this reason, the effects on contractors could be huge.
First of all, with the new change, contractors in the private sector are losing their rights to determine their own tax status. HMRC decided that this was ineffective in tackling the issue of tax-avoidance in contractors and therefore the decision is being moved to the end-client. This is a big change for workers as they will now be told what their IR35 contractor status is. However, this decision does not have to be final, and with the changes, contractors can appeal their decision. The end-client will have 45 days to give evidence to support their decision and the tax status can be overturned if they do not provide enough evidence to support it.
Another effect on private sector contractors is that they might find that businesses are more reluctant to hire contractors. As tax liability now sits with businesses, this means that any fines or penalties for wrongly made decisions also sit with them. Hopefully, as businesses become more comfortable with the situation and the changes are well underway, these organisations will be more willing to take on contracted workers.
How to ensure you comply with the IR35 rules
Of course, as a contractor, you want to ensure that you’re complying to the IR35 rules as best as you can. But what are the ways to do this?
Review your contract
First of all, you need to review any existing, past and future contracts carefully. Although you may make changes to ensure you’re compliant from now on, HMRC can also launch IR35 investigations into your previous work history so it’s a good idea to review those for compliance too. This will make sure that you’re prepared for any investigations, both financially and mentally. Here are some things to look out for in your contract that may indicate an ‘inside IR35’ status:
- Set working patterns
- Specification that only you can complete the job
- High-level of input from the client as to how the job should be completed
- Usage of the client’s equipment
- Specification that you cannot work for anyone else whilst you’re completing the job
All of the above indicate an ‘employment relationship’ which is what HMRC does not want to see if you’re claiming that you’re ‘outside IR35’. If any indication of the above is in your contract, you should carefully consider the tax status that you’re claiming and make a decision whether you want to take on the contract at all.
Communicating with the end-client
In the negotiation period, before a contract is agreed, speak to your end-client and ensure that you’re on the same page. Bear in mind that it will be them who are making the decision on your tax status and you should ensure that they are fully aware of what the IR35 test is and the potential effect it could have on you. Discuss the ins and outs of what they plan to put in the contract and make sure that it aligns with your ‘outside IR35’ status. Openly communicating in this way can help you both comply with the legislation and avoid any unwanted fines.
Go through a third party
This is an option that many contractors choose to pursue as it eliminates the chance of any unwanted fines or surprise penalties. With a third party, such as an umbrella company, you don’t have to deal with the IR35 legislation or worry about whether you’re compliant. These companies will do all of the legwork for you, and all of these companies ensure that you’re complying in the way that you should. These intermediaries act as a middle-man between you and the end-client by becoming your employer as such. Through these companies, you secure yourself the best financial deal as well as ensuring you’d pass any IR35 investigations with flying colours. You can use the form on this page to find and compare umbrella companies that would match your services.
How to prepare for IR35 in the private sector?
As we’ve discussed, the official changes for IR35 in the private sector aren’t due to be implemented until April 2020. So, how can you prepare for the changes until then?
Encouraging conversations
Encourage a conversation with your end-client. Talk about your current contract in detail and find out if they’re clued up on IR35. Once you’ve reviewed your contract and looked out for any breaches of the IR35 rules, you should raise this with your end-client. Is there any way that these parts of the contract can be renegotiated so that you’re definitely ‘inside IR35’? Remember, HMRC are looking out for contractors who have a noticeable ‘employment relationship’ with their clients to try and spot ‘disguised employees’. Of course, you want to avoid any nasty penalties or gaining the status of ‘inside IR35’ so a conversation with your client is certainly the first step to take.
Understanding the legislation
Although we’ve briefly run through the ins and outs of the IR35 legislation, make sure you’re entirely clued up. This will allow you to appeal your client’s decision with confidence if they’ve determined you as ‘inside IR35’ when you believe that you are ‘outside’. Being fully clued up on the legislation also allows you to make more educated decisions when it comes to whether you want to accept a contract or not. From a financial perspective, it may be against your best interest to accept a project that will place you ‘inside IR35’. Spend some time reading our IR53 explained article to decode the lingo you need to know or gain some extra advice from an expert.
Taking out insurance
Another way to prepare yourself for the IR35 legislation changes is by taking out insurance. With IR35 insurance, you are covered in the event of any fines or penalties as a result of an HMRC investigation that finds you ‘inside IR35’ when you’ve been claiming to be ‘outside’. Many insurance companies also offer you expert representation if the case has to be taken to a tribunal, this can give you extra reassurance.
With companies in the private sector soon to be facing the IR35 reform, it’s important that you’re communicating with your end clients, reviewing your contracts in line with the IR35 rules, and making preparations to protect yourself in the case of an investigation.
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