IR35 - what you need to know
With changes to IR35 being made as recently as this month, the legislation continues to be a major headache for employers and contractors alike.
Less than six weeks to go until the April 2020 implementation date, such changes are only adding to the confusion around the new rules. We are still seeing a lot of people unsure if and how IR35 will impact them, and what they need to do about it.
Now is the time to get informed and make sure you know how the legislative changes are likely to impact you. As a contractor or organisation you need to understand what IR35 means for you in order to stay compliant, legal and financially secure.
What is IR35?
IR35 is a reform to off payroll working regulations. From April 2020, it will come into force for all medium and large private sector organisations, following the rollout to the public sector in 2017. Small companies are exempt - a company qualifies as small if two of the following conditions apply; less than £10.2 million annual turnover, less than £5.1 million balance sheet total or fewer than 50 employees.
From 6 April 2020 responsibility for working rules moves from individual contractors to the organisation they are working with. It will be up to the organisation to determine if contactors fall inside or outside IR35. Where IR35 is applicable, the contractor’s fees will be subject to tax and National Insurance contributions.
What is status determination?
Organisations can determine if their contractors are inside IR35 (performing the role of a permanent member of staff) or outside IR35 (self-employed) by looking at a number of criteria. These include having little or no supervision, direction or control over the contractor and the contractor being able to perform the work independently, with the right to use a substitute if required.
HMRC’s check employment status for tax (CEST) tool can be used to give a good idea if you and or your contractors fall inside or outside IR35. This is not a perfect tool and has been criticised but it can be useful as an indicative measure for both organisations and contractors, and can be used in order to support (or appeal) a status determination assessment.
Remaining compliant is critical. Many organisations are in the process of finalising their contractors’ status determinations. It is important to act now - if status determination is not complete before the deadline, contactors will automatically be deemed outside IR35. If this is incorrect and audited, the organisation will face significant penalties applied by HMRC.
Many contractors mistakenly assume IR35 does not apply to them because they have multiple clients. However, it is each individual role that matters - if you are performing the same job as your permanent counterparts then you will be deemed inside the new legislation.
What if you are inside IR35?
IR35 aims to tax all workers at the same level, and ensure the same level of workers’ rights across the board. However, it raises many questions for organisations and individuals.
IR35 does not achieve its stated aim of taxing those within IR35 at the same level as employees since those within IR35 will also be subject to employers NI deductions as well as employees NI, without an uplift in the rate they are paid. This results in much higher levels of tax being paid by those within IR35.
Examples are shown below in this table from NASA Group - a UK contractor accountancy solutions provider. It has projected that someone with a £200 day rate who falls inside IR35 using an umbrella payroll solution would take home £118 less per week, and a £500 day rate would would result in £235 difference in weekly take home pay.
One solution to IR35 is for organisations to offer their contractors permanent jobs. As these roles include benefits such as holiday, sick and parental pay, bonuses and share schemes, and do not carry additional overheads of running a company, the annual salary can for some be comparable to contractor income.
While this can work well, in the broadcast and media industry contractors play a significant role. The flexible workforce suits many organisations who can use such workers to fulfil work at peak times, and at unsociable peak hours for broadcast, including evenings, nights and weekends without needed to make redundancies when they are not required. It also has a number of benefits for individuals too, allowing them to work flexibly and autonomously and to gain exposure to a variety of working environments, teams and assignments.
Other solutions include contractors bearing the full cost by accepting the reduced net pay or a hybrid solution where employers bear the cost of the employers NI, and the contractor covers employees NI and PAYE tax.
Every contactor and organisation is different so it is impossible to give blanket advice on IR35. Seeking independent advice from a tax specialist or consultant will help you fully understand were you sit within the new legislation so you can best plan for the future. If you are a contractor and are keen to discuss your career path, or an organisation and would like to know more about how IR35 will impact your team, do get in touch with us.