You may have heard the term ‘IR35’, especially if you are in the contracting market.
There are years of case law, twists and turns in this area. We aim to give you a quick rundown on how this is likely to affect you, right now.
What is IR35?
IR35 describes a set of tax and national insurance rules that can be applicable when an individual supplies their services to an end client, via an ‘intermediary’. Usually via a limited company (you may have heard this referred to as a ‘PSC’ or Personal Service Company).
It is a consideration when you have a Limited Company contractor working for an extended time with a single client.
The rules are there to restrict individuals and employers from routing income through companies to save tax.
Without these rules, an office full of people employed on the Friday could come back on the Monday as ‘contractors’. This would likely save the employer a ton of money in employers’ national insurance contributions, pension and paid holiday. The previous employee will often win with more favourable tax rates offered by a limited company.
If you are caught inside the IR35 rules, you are treated as an employee, so your tax and national insurance will be affected. There is then a host of practical issues that you as a company, your agency or client and your accountant need to sort out!
As a result, most people try their best to ensure their circumstances are outside IR35.
What has changed recently?
Despite this being in the news recently, there have not been many actual law changes over the years. The main tweaks have come from cases heard in the tax tribunals, followed by HMRC and contractors trying to adapt.
The most significant change is that by default it is up to the contractor to determine if you are caught by IR35. This changed for those people working for public sector organisations (say NHS, HMRC(!) etc) from April 2017. This put the onus on the public sector client to decide if you were inside/outside IR35. What happened from that moment is that the public sector decided everyone was caught by IR35. This led to a wave of people moving contracts back into the private sector or using umbrella companies to continue working in the public sector.
Are Umbrella companies the answer?
These are somewhat of an oddity. From a tax and law point of view, you are employed by them and work for clients via your Umbrella company. Because of this, Umbrella companies are not tax favourable. They are most useful when working with public sector clients and agencies. This is often the only way they will allow you to work with them.
The rules are due to be extended to the private sector next April. Companies that are ‘medium or large’ engaging contractors will be affected.
How does this affect me as a person with a limited company?
If you are ‘contracting’ through an agency or working for a medium or large company, keep your options open. Large companies are beginning to assess their options ahead of April. Many contractors have been offered permanent positions or their contracts are being brought to an end. It is advisable to speak to your contact at the client about what the future holds.
If you are looking at working for a public sector client you will probably find it’s difficult to do with your limited company. Ask your client about this.
If you work for small companies, you just need to decide if you fall within IR35 or not. There are many indicators on this, so if you have any concerns you should consult a professional. HMRC do have their own tool, but it is (in our opinion) a little biased towards their views rather than the law. Give it a try out to give you an idea of some issues, here.
If you are engaged by a small company for a short project, use your own tools, and complete your work unsupervised, you are generally fine. This is designed to catch situations where you should really be employed. If you compare yourself to an actual employee of the company and how they operate. If you feel too close to that you should have further concerns.
The actual case law on this is pretty good (and specific – which this article is not), so do consult a professional if you need an opinion on your circumstances. If you fancy reading up on some recent cases:
How does this affect me as a business owner looking to engage a contractor or limited company?
If you are a small company, you need generally not have many concerns about the upcoming changes.
However, if you have contractors and engagement of limited company employees in your business that have been there a long time and operate akin to an employee, consult a professional.
For medium or large companies you should act now and engage a professional to help with the transition, as it’s likely if you engage contractors you will be affected.
If you are a limited company who works for medium or large companies and would like to chat further on this, then please contact us.