IR35 is a tax legislation that has been prevalent for many years now. The fundamentals of which are; you should be employed rather than self-employed.
This is of course an extremely simplified version, so let us go further. The legislation was introduced to restrict abuse by individuals typically trading via an Intermediary (typically an agency or LTD company), rather than being paid via PAYE. The latter, being a less tax efficient way of earning money.
Initially the rules had the individual determining if they fell inside the IR35 legislations, thus allowing the individual to decide if they were to be paying NIC’s and income tax via PAYE. As you can imagine, not many individuals determined they were inside IR35 rules.
From April 2017 however, HM Revenue & Customs flipped the switch. From April 2017, public sector organisations now had to determine whether an individual fell inside IR35 rules for tax purposes and were equally liable for NIC’s and Income tax due on these placements. This lead to a sharp decrease in individuals contracting via LTD companies in the public sector, due to the increased risk on the shoulders of the end client.
From April 2021, after being delayed from April 2020 due to COVID-19, the same rules implemented in the public sector, are now being rolled out in the private sector for large and medium sized companies. This has led many contractors and clients searching for answers and indeed new opportunities. The attractiveness of trading via a LTD company not only saved the end client money on employers NI (13.8%) and pension costs (3%) on an employee’s wage, the individual contracting also had more flexibility and a larger take home pay.
In addition to the public sector rules being rolled out, new rules are also being implemented. Any contracting role, the client must tell the worker and agency the IR35 determination decision, by issuing a Status Determination Statement (SDS). More details can be found via: https://www.gov.uk/guidance/april-2020-changes-to-off-payroll-working-for-clients .
So where do we go from here?
As stated above, the rules apply to Large and Medium companies. As such, there is an exemption for Small Businesses to continue using contractors who meet the IR35 rules to do so. To be classed as a small business, you must meet 2 of the following criteria;
- Annual turnover under £10.2 million.
- Balance sheet total under £5.1 million.
- Under 50 employees.
Here at AME, we believe this to be a huge Small Business Win. We’ve already seen many of our clients finding new contracting roles with smaller companies and hope this can continue to help Small Businesses everywhere.
The new IR35 rules, whilst applying to all UK tax resident workers, if the end client or agency is wholly based outside the UK, then the new IR35 rules will not apply. We do recommend however, dealing with this with caution and seek advice.
Keep yourself outside IR35
With the new rules being implemented imminently, you’d be forgiven for thinking contracting via a LTD company will be all but stopping. Here at AME can assure it won’t. There will always be a need to contractors. Therefore, ensuring you are outside IR35 will always be to your advantage and as such, you want to focus on the following which heavily determine one’s IR35 status;
- Control – If the end client specifies your workings hours, days, where you work and how you work, this would be deemed as a great deal of control and you would be classed as an employee.
- Obligation of work – If the client will promise you work and is indeed obliged to give you work, this is a clear indication of being inside IR35.
- Substitution – Can only you do the work? Or could you and your company provide a substitute for yourself? By ensuring a substitution can be made (contractually or otherwise), this helps maintain a status outside IR35.
If you find that your client has determined you are inside IR35, be prepared to negotiate. No, not try change their mind (this will mostly likely not be changing), but be prepared to negotiate a higher salary. Trading via PAYE, your take home pay will drop, therefore negotiating a higher salary or daily rate, can offset some of this reduction. If however you do want to question your client’s determination, you can check your status via: https://www.gov.uk/government/publications/check-employment-status-for-tax-cest-2019-enhancement .
We believe whilst undoubtedly, those who should be under PAYE, should be paying their taxes, however, at a time when the UK is still reeling from COVID-19, contracting via LTD companies is a valuable lifeline for many. It creates jobs, investment and more. We would welcome a review of any such IR35 rules in place. However, we hope this can be used a valuable opportunity for Small Businesses around the UK, to use cost savings against larger companies, they otherwise wouldn’t have had.
Here at AME, we’re a champion of Small Business, therefore anything that can level the playing field, we welcome it. So Medium and Large businesses out there, watch out, because there may be many more Small Businesses out there, that will legitimately rival you now.
For more on this or anything else, do not hesitate to contact us for a free consultation.