In March this year, the Government announced it was postponing the long-anticipated, controversial reforms to IR35 in the private sector for a year, from 6 April 2020 to 6 April 2021.
The announcement, which came just a couple of weeks before the changes were due to roll out, was a relief for many businesses and contractors – delaying the reforms meant they had one less thing to worry about in the midst of their initial pandemic response.
‘Delay’ is the key word here, however, and Steve Barclay, chief secretary to the Treasury, was keen to emphasise that point when he announced the decision back in the spring.
“This is a deferral, not a cancellation,” he said. “And the Government remains committed to reintroducing this policy to ensure that people who are working like employees, but through their own limited company, pay broadly the same tax as those employed directly.”
Although contractors and business owners alike are still facing significant financial pressure, as well as a great deal of uncertainty around what might happen between now and April, the changes to off-payroll working rules in the private sector were legislated for in Finance Act 2020.
Making sure you’re ready now will help to avoid even greater upheaval when the changes take place in April 2021.
If you’re a contractor and you’re not sure what IR35 is or how it’s changing, it’s essential that you find out how it might affect you before next April.
The term ‘IR35’ describes a set of tax rules that can apply if a worker provides their services through an intermediary, such as their own limited company.
These rules intend to ensure those who work in the same way as employees pay broadly the same tax and national insurance contributions (NICs) as those in employment.
Currently, workers’ intermediaries in the private sector are responsible for determining their employment status under these rules, but the upcoming reforms mean this responsibility will shift to the businesses engaging their services.
The same controversial reforms have already been in place in the public sector since April 2017.
There’s an exemption for small businesses, so you’ll see no changes if you only provide services to small clients that have two or more of the following:
- an annual turnover of more than £10.2 million
- a balance sheet total of more than £5.1m
- more than 50 employees.
If you provide services for medium and large private sector businesses, however, the changes mean your client will need to assess several factors to determine whether you qualify as employed or self-employed for the purposes of IR35, and will inform you of your status.
If you’re found to be working ‘inside IR35’ – in essentially the same way as an employee – you’ll be required to pay tax and NICs as if you were employed.
How to prepare for IR35 changes in the private sector
Carrying out a contract review, or asking a trusted expert to conduct one on your behalf, will help you to find out how likely it is that you could be caught by the rules, and whether there are any changes you could make now to avoid it.
The tests for IR35 are complex, and several factors need to be taken into account. Three of the most important tests include:
- Substitution: Can you send someone else to do the work in your place?
- Control and direction: Who chooses the work you do and how you do it – you or your client?
- Mutuality of obligation: Is your client obliged to provide work for you to complete, and are you obliged to accept?
Other factors include things like whether or not you use your own equipment, the level of financial risk you take on, your overall involvement in the organisation, whether you’re paid by the job or at a fixed rate, and whether you work exclusively for one client or more.
You can use HMRC’s ‘check employment status for tax’ (CEST) tool to indicate whether or not your contracts fall within IR35.
Businesses have also been advised to use this tool when they’re making status determinations for contractors, and HMRC has said it will stand by the result given by CEST, so it’s a good idea to see where you stand.
You may also need to contact your clients about IR35 if they haven’t already been in touch with you, to ask them how they’re approaching the changes. The sooner you know their approach, the better you can prepare.
Once you know how likely you are to be affected by the reforms, you can make any necessary updates to your contracts, and adjust the way you work to put yourself in the best possible position.
Be aware, though, that HMRC won’t accept arrangements that are obviously contrived to reach a certain decision. Be honest with yourself – if the way you work is highly likely to be caught within IR35, you may be better off considering alternative options to contracting.
At JCS, we’re more than happy to review your contract and offer an informed, objective opinion on how the IR35 rules could affect you, as well as supporting your business and financial plans going forward.
There’s now half a year to get ready, so if you’re affected by the off-payroll working rules, use this time to plan so you don’t lose out.
Get in touch to arrange a contract review and prepare for IR35.