IR35 legislation ensures that UK contractors pay the same tax and National Insurance contributions as an equivalent employee would. In April 2020 changes to IR35 will be implemented for private sector contractors, transferring responsibility from contractors to large and medium companies to assess IR35. This reform will bring private sector IR35 in line with the public sector, where similar rules were introduced in 2017. The draft legislation was published on July 11 2019, and reflects the public sector changes very closely.
There is a limited exclusion for small companies, defined by HMRC as not exceeding two or more of the following criteria; an annual turnover above £10.2 million, a balance sheet total over £5.1 million, or more than 50 employees.
Currently, in the private sector, contractors are responsible for making their own assessment as to whether they fall inside or outside of IR35. If they make the assessment incorrectly, it is the contractor and not the client or agency who is liable for any unpaid tax and NICs.
From April 6 2020, the client or fee payer will be responsible for determining whether a role is inside or outside IR35, and therefore whether a contractor’s fees should be taxed in the same way as if they were an employee. They will also be responsible for accounting for employer’s NICs and the apprenticeship levy, with liability for tax and NICs potentially passing to the client if it is deemed to have failed to take ‘reasonable care’ in making the decision.
What will the changes mean for contractors? If they are assessed as inside IR35, contractors will need to pay the same income tax and NICs as if they were employed, but they still won’t receive employment benefits, such as paid holiday or sick leave, from the managing business.
Being assessed as inside IR35 can also have financial implications for the contractor, including a reduction in their net income. HMRC can also go back at least six years and evaluate all contracts within this time to see if the legislation applies, which could result in contractors owing hundreds of thousands of pounds.
Contractors will be entitled to know how the decision on their IR35 status is reached If they cannot agree, a process of appeal to the client by the contractor must be available. HMRC will not have any specific appeals process, and the contractor can only raise disputes through the income self-assessment process.
Contractors and clients should work closely together and familiarise themselves with the way in which the rules already work in the public sector, particularly the HMRC Check Employment Status for Tax (CEST) tool to come up with a more considered course of action.
For more information on IR35, read our interview with Anita Williams here.