If you’re a contractor or freelancer then the date 6th April 2021 has probably been on your mind for months. This is the day when the government’s updated rules for off-payroll working– also known as the dreaded ‘IR35’ – come into effect if you work for clients in the private sector. However, as long as you’ve had the right advice then there’s absolutely no need to panic.
This guide will clarify the new rules and explain your options moving forward.
What is IR35?
IR35 is legislation that clamps down on ‘deemed employment’. This is typically when you work regularly for a particular client under, at least in the eyes of HMRC, terms similar to an employee. However, because you’re self-employed, or working through an intermediary, you avoid paying national insurance and income tax at source on your earnings from that client.
The updated rules would have been introduced in April this year but were postponed due to Covid-19. What’s interesting is that the legislation itself, which is part of the Finance Act, hasn’t actually changed. It’s just who has the responsibility for deciding who’s classed as an employee and who isn’t, and therefore who bears the risk of getting the decision wrong. You the contractor used to decide. But now it’s your client.
This has attracted plenty of criticism. Why? Because when the rules changed for public sector clients three years ago, many panicked and classed bona fide contractors, who were in business in their own right, as employees. This meant they had to pay income tax and national insurance at source – which cut their earnings by 25%.
Will this affect you?
Unfortunately the underlying IR35 rules are not straightforward and, when significant sums are involved, it can sometimes end up in court. However, in most cases, it will come down to HMRC’s assessment of any written contract and your actual working practices.
Three important questions to ask yourself are:
- Does your client control when, where, and how you work?
- Do you have to accept work supplied by your client?
- Do you have to complete work personally or can you send a substitute?
If the answer to these questions is ‘yes’ then it’s likely IR35 could apply. It’s therefore worth seeking expert advice. HMRC will also look at other factors like whether you have an office at your client’s premises, and whether you received a job title or company email address. The more autonomy you have, the stronger your position will be.
The big problem, of course, is that from April 2021 you won’t have the power to decide your own status if you’re working for a medium or large organisation. It’s up to your client to decide your status, and they might be unduly worried about potential penalties or an HMRC investigation. Indeed, we’re seeing some organisations mistakenly imposing blanket policies whereby all contractors and freelancers are suddenly classified as employees and asked to go onto the payroll. However, if you’re contracting to a small organisation, then you remain as the status decision-maker (and risk-taker).
What can you do?
If you’re deemed as an employee then you may be able to negotiate. The legislation makes room for a client-led disagreement process. You might even be able to open a dialogue before any decision is made. Then you can have your say early on.
Sadly, however, it’s not always possible to escape the clutches of IR35. In which case you’ll have some tough decisions to make.
Here are your main options:
Adjust your contract – look at the terms and practices of your existing contract. If you can tweak your arrangements to your client’s satisfaction, whilst demonstrating that you’re in control of how and when you work, then a compromise could be found. If you want to remain a contractor, don’t give up until every avenue is explored.
Bite the bullet – the simplest option might be to go onto the client’s payroll. Although this means you’ll potentially take that 25% pay cut, you may instead pick up some of the associated benefits of being an employee, such as paid holiday and sick pay.
Work via a recognised umbrella company – an umbrella company could be a good option for this particular rainy day. It’s a standard UK limited company operated by a third-party who acts as your ‘employer’. Your client then pays the umbrella company who pays you (deducting income tax and NIC at source).
This approach has pros and cons. Although you’ll lose earnings, and umbrella companies will charge to administer the PAYE for you, you’ll comply with IR35 by paying the PAYE, reduce your compliance risk, and there’s less paperwork to worry about. Most weeks you’ll simply submit a timesheet. You’ll also retain the flexibility of being able to go from contract to contract, as you won’t be an employee of the client; although of course this means you also won’t enjoy any employment benefits either.
Although none of these options are ideal, at least you can keep working for the same client(s) without too much change. Given the difficult economic climate, when other opportunities may be scare, this could be your best option for now.
What if you’re a limited company?
If you work as a limited company and you’re caught by IR35, winding down your company may be a consideration. However, think about this carefully first. Whilst some contracts may fall under IR35, others may not.
What’s more, there are several disadvantages to closing your company. Depending on the value in your company there could be charges to wind down, plus you could lose valuable Entrepreneurs Relief if you have been trading for under two years.
Furthermore, although the benefits of working as a limited company are reduced under IR35, there are still some perks: you’ll remain in control of your own business, enjoy (more limited) opportunities for tax planning, claim expenses against the income, and make your own pension contributions. This is something you’ll need to weigh up.
If you’re not ready for that just yet, you could consider dormancy. Whilst there are still ongoing (though reduced) responsibilities and costs, this allows you to keep your company name (so nobody else takes it), avoid winding down costs, plus you can resume work as before if your circumstances or current legislation changes.
How we can help
Because the implications of IR35 are complex, it’s important to know where you stand. We help many of our clients assess their position and exposure to IR35. However, if you’re in a position where you need to make your case regarding your status, for example to your client, then we believe an independent assessment carries more weight than one carried out by your accountant.
Consequently we can arrange for an independent specialist IR35 team to assess your contract(s). This team will review your contract and working practices, explain exactly where you stand, and suggest changes to your contractual terms and working practices to help you comply. You’ll receive a written report of their decision, which can then be used to help you demonstrate and state your case. The cost of this is likely to be less than you think, and we believe it is great value for the reassurance it provides.
Depending on the outcome, we can then help you with your next steps, whether that be calculating net pay scenarios, tax-efficient extraction of profits from your company, or arranging for your company to be closed or kept dormant.
Always remember that if you’re a genuine contractor, freelancer, or consultant then you should have nothing to fear from IR35. ‘Contracting’ hasn’t become a dirty work. Indeed, freelancers, consultants, and other non-employed workers are still valued for their skills and flexibility.
It’s simply a matter of understanding the legislation, recognising your status, and planning ahead. It’s also important to consider the implications of IR35 in the future. When you’re expanding your client portfolio, and negotiating new contracts, make sure you stay the right side of the lines.