IR35 fact or fiction
IR35 is new legislation – fiction
Many people think IR35 is a new piece of legislation that is being implemented from April 2020. Although there are significant changes from April, IR35 has been around since April 2000 and the purpose of the legislation is to combat disguised employment.
It was previously the contractor who was responsible for determining the IR35 status of their contract. In April 2017, a public sector reform was introduced where the hiring client was made responsible for making the IR35 determination.
From April 2020, the changes have been extended to the private sector and will apply to any medium and large businesses hiring contractors working through a limited company.
In other words, it will be your end client (or the “fee payer”) who will now have responsibility for determining whether your contract is inside or outside IR35.
You need to be aware of IR35 – fact
The IR35 status of a contract will make a significant impact to the amount of your take home pay.
If your client decides that the contract is inside IR35, the income paid to your limited company will be subject to income tax and national insurance contributions. The fee payer, which could be the end client or a recruitment agency, will then be responsible for calculating and making the deductions before payment is made to the contractor’s limited company.
The new rules apply to all companies – fiction
The new rules will apply from April 2020 to medium and large businesses only. Where the end client is a small company, the responsibility for determining the IR35 status remains with the contractor. A company would need to meet two of the following criteria to be classed as small:
- Annual turnover no more than £10.2m
- Balance sheet total no more than £5.1m
- No more than 50 employees
Companies cannot make blanket IR35 determinations – fact
A blanket determination is where an end client decides that all contractors engaged with them are caught by IR35.
HMRC guidance states reasonable care should be taken when determining the IR35 status of a worker, so making a blanket assessment would go against this guidance.
Many companies in the financial sector appear to have decided not to engage with contractors working through a limited company from April onwards. They are offering the worker to either take a PAYE role or work through an Umbrella company, which means they do not have to make a decision on IR35. This removes the risk they would have in making incorrect IR35 determinations.
You can’t have multiple contracts with different IR35 determinations – fiction
IR35 is something that applies to the individual role, not the individual. Therefore, it is possible to have multiple contracts at the same with some being inside and others being outside of IR35.
In these cases, we would advise you seek expert IR35 advice or speak to an experienced accountant firm, like Gorilla Accounting. However, for those contracts that are caught by IR35, the relevant income tax and national insurance contributions would still need to be made based on the payment made by the end client.
You can keep your company open even if you are moving to a PAYE role – fact
You can keep the company open even if you have chosen to work in a PAYE role from April 2020.
This could be a good option if you see the PAYE role as short-term work and you want to assess what outside of IR35 contracting roles will be available from April. This would also save you the cost of closing the company, which could include liquidation fees, and you could benefit from the tax-free dividend allowance each tax year.
If you are unsure on whether to keep the company open, we would advise you contact your accountant as there may be further tax efficiencies for you to take advantage of.
You need a specialist accountant if you are a self-employed contractor – fact
If you are a self-employed contractor or freelancer, it’s essential that you choose an accountant that specialises in this complex area.
A specialist contractor accountant will be able to help you make decisions about the best way to work (through a limited company, as a sole trader or through an umbrella company). They’ll also be on hand to offer you valuable day-to-day advice which could save you time and money in the long run.
