The Government’s decision to delay changes to IR35 to April 2021 will be welcomed by contractors, but the legislation still requires contractors to check their status and convince risk-averse clients that they fall outside it. Jo Faragher examines the implications.
Stephanie works as a contractor on a crucial cybersecurity project for a health insurance company. Her former client, a bank, announced it would no longer use contractors working through their own limited companies, in anticipation of IR35 changes, or ‘off-payroll’ legislation.
This was initially due to come into force in April this year for private sector employers, but has now been postponed until April 2021.
“I thought it would be a good move,” she says. “My agency assured me that the insurance company would be happy for me to work outside IR35, but then in January it announced that all contracts would have to be individually assessed.”
The company concluded that Stephanie would be ‘inside IR35’ – operating like a permanent, salaried employee who would need to pay appropriate levels of tax and National Insurance – and so her contract would have to end several weeks early. “They invited me to apply for a permanent position but I’d end up with half the salary I’m on
now,” she says.
She is considering a move to Dublin, where she can find similar roles without falling foul of the legislation.
Stephanie’s story has become common in the past few months as the initial IR35 deadline loomed. The changes mean that businesses – rather than individuals – will now be responsible for deciding whether contractors should be paying tax and National Insurance at the same level as employees, or whether they are genuinely self-employed for tax purposes.
HMRC wants to claw back £3 billion in taxes that it believes comes from ‘disguised employment’, and the Government has estimated that only one in 10 private sector contractors are paying the right level of tax.
As the initial deadline approached, many employers refused to engage with contractors at all – a survey by IT consultancy bedigital found that more than 40 per cent of UK businesses are considering phasing them out altogether.
Businesses with a turnover of less than £10.2 million or fewer than 50 employees are excluded from the reform (see box), but thousands of contractors who work for clients via personal service companies (PSCs) now face negotiations with clients over whether they can continue to work on a freelance basis.
Contractor accountants estimate that moving onto a company’s payroll could mean taking home between 20 and 30 per cent less, but it’s not just about the cash. “Many contractors work that way because of the work-life balance and variety, and to escape corporate politics,” says James Poyser, CEO of contractor accounting company InniAccounts. “It will be hard to convince many to go permanent.”
When the changes were introduced in the public sector in 2017, numerous employers had to relax policies banning contractors when many left for more flexible or lucrative contracts elsewhere.
Prove your status
If you work as a contractor, you need to determine what your tax status is likely to be.
The Government’s Check Employment Status for Tax (CEST) tool asks questions such as how you are paid, whether you use your client’s equipment and whether you can or do work for other clients.
“If you’re running as a PSC you need to get a handle on the CEST tool,” advises Lorence Nye, senior policy advisor for finance, tax and economy at FSB. “What are the questions and your likely status?
If you’re happy with that, continue.
If not, work with your client, as there could be a a change that would make your status clearer. There are things in the tool that point to one status or another, so use that as a guide.”
Melanie Stancliffe, a partner in the employment team at law firm Cripps Pemberton Greenish, says there are a number of ways you can show clients you are self-employed. “Contractors have self-interest in providing information to their client showing that they work for multiple clients, have autonomy over when and how they work, can provide an alternative worker, can decline work or have agreed arrangements that don’t resemble employment – for example they invoice themselves and
provide their own tools and insurance,” she says.
If the client insists you fall inside IR35 and must become a permanent employee or cease working, and you’ve demonstrated the factors above, it’s crucial to challenge them.
She adds: “If a worker looks self-employed, they should be excluded from the IR35 deductions. Workers are entitled to written reasons from the business and to a review of the decision. They can also ask HMRC to recalculate their tax liability.”
Talk to your client and any professionals you work with, such as your accountant, throughout the process. “Work with your clients and agencies to understand how they plan to do the assessments,” says Jonny Hiles, Solutions Director at recruitment company Sanderson. “Some will be happy with you working through a limited company, or they may want you to switch to an umbrella company or be open to you taking
a permanent role.”
With an umbrella scheme, you become an ‘employee’ of the scheme and draw a salary after deductions for tax, National Insurance and the scheme’s management fee. While
you have the independence of a contractor, take-home pay is similar to what it would be if you were working on a permanent basis, as tax is deducted at the same level.
“Consider your pricing model,” recommends Annabel Kaye, Managing Director of legal contract firm KoffeeKlatch. “What effect would a 25 per cent deduction on your cashflow have?” she says.
Changing the way you work so your contract is more likely to be deemed outside IR35 is another option, Ms Kaye adds. “Review your business model to see if you can use substitutes at least some of the time, and get a wider client base if you can.” If you work through an agency, the liability for deciding who falls inside or outside IR35 still falls to the client, but your agency will be responsible for deducting the right level of tax and National Insurance.
Reviewing working practices
Matt Tyler, consultancy manager at contractor insurance company Larsen Howie, advises carrying out a “working practice review”. If you’re not confident about this, a number of companies offer assessments on behalf of clients or contractors and are prepared to underwrite the outcome. Mr Tyler says: “If the end-client isn’t sure, say ‘I’ve taken my contract to three companies and they’ve all deemed it to be outside IR35’. Or show them your insurance and use it as a negotiation tool.”
The threat of losing out on skills could mean businesses are more open to you continuing to work through your limited company. Stephanie’s client was already falling behind with its cybersecurity project and she believes its decision not to employ contractors will delay it further and increase costs. “They’ll realise they can’t work without a contingent workforce,” she says.
“The companies that are taking the time to do the assessment correctly are still offering contracts.” That, at least, is good news.
Small business exemption
The IR35 reforms being introduced in April 2021 do not apply to small businesses, going by the official definition of ‘small’ in the Companies Act 2006. This means they must satisfy two or more of the following requirements to be exempt during the tax year in question:
- An annual turnover not exceeding £10.2 million
- A balance sheet total not more than £5.1 million
- No more than 50 employees.
A number of small businesses that fall under the exemption will use contractors. In this case, it makes sense to ensure these individuals are aware of their own tax obligations, in case they assume that your business is responsible for applying the rules.
Will you fall under IR35?
Decisions in tax tribunals have shown that HMRC will look at how someone works on a day-to-day basis, considering a number of factors. But some of the indicators below could give you an idea of whether you are likely to fall inside or outside IR35:
1. Do you work for other clients?
If the answer is yes, you’re more likely to be deemed outside IR35 because the client is exerting less control and you can refuse work. Working for the same company over a long period of time, over the same shift patterns, is likely to flag up an employment-like relationship
2. Can you send someone else?
If you are able to send a substitute to do your work, that is likely to indicate you’re outside IR35. If it has to be you, it’s more likely to be inside
3. Does your client set your working hours?
Factors such as whether you use company equipment on company premises, work set hours and are told exactly what to do tend to be indicators of being inside IR35, while more autonomy or freedom to work where you like could point to being outside
4. How are you paid?
HMRC will look at whether there is an hourly, daily or weekly rate for the work or a fixed price, as this determines your financial risk. A more regular payment is more likely to
suggest you are inside IR35
Visit www.tax.service.gov.uk/check-employment-status-for-tax/ to check your status.