HMRC is introducing legislation that will bring new changes to IR35.
Initially created to prevent people from being able to dodge tax through ‘disguised employment’, new legislation will change the way employers and contractors apply employment taxes.
Applying IR35 – Who’s responsible?
From April, responsibility for deciding whether IR35 applies for individuals working through their own company in the public sector will fall to the employer, agency or third party, not the individual.
Ultimately, it is the body who contracts a company in the public sector who will decide whether that individual or company is a business or a worker – and apply the employment taxes accordingly.
If IR35 applies, taxes will affect any direct payments made on or after 6th April 2017, even if payments relate to services made before this date.
Making the decision
HMRC have released a tool at https://www.tax.service.gov.uk/check-employment-status-for-tax/setup to help determine whether workers on a specific engagement should be classed as employed or self-employed for business purposes.
While useful in theory, in practice many public bodies including the NHS have been ignoring this service, instead putting all contractors in the “worker” bracket, thus deducting tax and NI.
What’s the impact?
If a project is determined to be subject to IR35, all tax due will be paid at source, so you will receive a payment already net of PAYE. While it means that you don’t have to worry about budgeting for tax from your payment, for many contractors it will result in a reduction in take home pay of up to 20%.
Where VAT is concerned, this isn’t affected by the IR35 status, and contractors can continue to charge VAT on their services.
It’s possible that contractors will be impacted beyond the PAYE tax, as we may see costings for projects affected by the additional national insurance contributions that recruiters will have to make.
How to manage the changes – Ltd or Umbrella?
Changes to IR35 will mean individuals are increasingly looking for different ways to manage their business accounts. Using an umbrella company might seem like an attractive option, and some may argue that you’ll be better off because the additional workload of processing payments outweighs the minimum financial gain.
However, this isn’t necessarily the better option and it is still possible to use your Ltd Company and remain in control of your business. There is now a special method that can be used to complete your company accounts and tax returns, which takes into account the tax and NI contributions that are subject to corporation tax. Where possible then, we would advise you to use your own Ltd Company and avoid the additional 13.8% national insurance you will end up paying to an umbrella company.
Whichever option you choose, there are pitfalls to be aware of, and it’s essential you discuss these changes and how best to manage them with your accountant. How you deal with these changes could have further impacts on the rest of your finances, especially if you need to prove your income in the future, for example for a mortgage.
Further help and guidance
If you need further advice and support around these changes, Chippendale and Clark can help you in two ways;
1) We can discuss your employment status with your contracting body and raise the issue of IR35. While we cannot change the contracting body’s mind straight away, the first step is to open up a conversation around any decision.
2) We can help you keep your own company and still be better off, so you can remain in control of your business.
To figure out the best way of dealing with any changes to IR35, get in touch with us at Chippendale and Clark for some impartial advice and guidance – you’re under no obligation to use our service and we’d be happy to answer any questions you may have.