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The UK Government has announced that the IR35 reform introduced into the Public Sector in 2017 will also be rolled out to the Private Sector from April 2020.
What is IR35?
As a Limited Company Contractor, you will be aware that HMRC introduced the ‘Intermediaries Legislation’ that became known as ‘IR35’ in 2000. The legislation was introduced to combat ‘disguised employees’. This refers to an individual who would be treated as an employee were it not for the fact that they provide their services via their own Limited Company. Contractors working via Limited Companies are not liable to pay National Insurance Contributions on income taken as dividends, resulting in far less tax to the Treasury. As a result of this, IR35 exists to ensure that those working in this manner pay the tax they should.
What impact will the Reforms have?
In practice this will mean the IR35 status of all Contractors for a specific assignment will be determined by the Client, not the Contractor moving forward. If a Client determines that a Limited Company Contractor is ‘in-scope’ of IR35, then the Contractor will be liable for increased Tax and National Insurance Contributions.
To assist Clients with making the IR35 determination, they will need to use the HMRC digital tool - Check Employment Status for Tax (CEST). There is a series of questions about the levels if supervision, direction and control provided by the Client, which when completed, will give a binding determination of whether the assignment will be inside or outside the scope of IR35. Whilst the tool is already available, HMRC have recognised that it needs modifying to improve the accuracy of determinations.
What will be the role of the Recruitment Agency?
The Recruitment Agency will be responsible for applying the Client’s determination. If this determination is that the Limited Company Contractor is ‘in-scope’, the Agency will be required to deduct Income Tax and National Insurance at source, exactly as if the Contractor was an employee.
It should be noted that your employment status as a Contractor will not change – you will not become an employee of either of the Client or the Agency. A Contractor will be able to appeal any determination made by a Client. HMRC have stated that the new rules will not be applied retrospectively.
What is NES Global Talent doing?
NES Global Talent has been working closely with its Trade Body the Association Professional Staffing Companies (APSCo) over the last year to ensure HMRC listened to the concerns of the Recruitment Profession, Limited Company Contractors and Clients. We also lobbied strongly for HMRC to implement the changes over a sensible time frame and address the concerns of all stakeholders. NES has also modified its payroll systems in order that it can deduct Income Tax and National Insurance as required, and we have amended our contractual documentation to reflect the new arrangements.
NES will continue to support both our Contractors and Clients to implement the new processes required and help both navigate the changes that will be necessary. We expect the new legislation to be published by the Government in late 2019. For Contractors, NES will continue to provide updates in preparation for the implementation of the legislation in April 2020 when further information is released by HMRC. Rest assured, Compliance and Customer Focus is at the heart of what NES does and we will be there to support you.
Will NES be reviewing the wording of their contracts in light of IR35?
T&Cs will not be amended as we consider that they are already fit for purpose. HMRC will always consider the contract paperwork and the day to day working practices of each assignment. NES issue a business to business contract to all limited companies and therefore believe that it is already fit for purpose.
What are NES planning to do when IR35 becomes a reality?
NES will work in collaboration with clients and contractors to ensure that reasonable care is demonstrated by the client when making assessments relating to the IR35 status of all Assignments.
If an Assignment is determined to be inside IR35 or the Contractor’s working practices meaning they are inside IR35, then the Contractor will be offered the option to be paid PAYE by NES, or paid PAYE through their Personal Service Company (PSC), or paid via an NES Preferred Supplier List (PSL) Umbrella Limited Co.
Will NES provide support with any potential IR35 negotiations?
NES will work in collaboration with clients and contractors to ensure that reasonable care is demonstrated by the client when making assessments relating to the IR35 status of all individuals. If an individual is determined to be inside IR35 then they will be offered various options to be paid as stated above.
Will NES set up a series of companies (with less than 50 employees) which people can sub contract to, in order
to avoid the change?
No, the exemption for small and medium companies only applies to the ultimate end user, not to the agencies.
IR35 and My Contract
1. How will IR35 effect my current contract if I am mid project?
If the role is determined to be within the scope then contracts will be terminated and the payment model of either PAYE or an Umbrella Company will be available. If deemed outside of scope then the contract will continue with any future tax liability moving to the Fee Payer post April 2020 and staying with the PSC for contracts pre April 2020
2. Are short term contracts liable to IR35?
Possibly, as each contract/assignment is looked up on by HMRC in their own right.
3. How does it work if I subcontract for two different companies?
Each role will be assessed on its own merit and the outcome could be different on each.
4. Would I be able to carry on with my current role as a self-employed rather than a limited company?
No, self-employment is governed by the intermediaries legislation
5. Will sub-contractors be offered permanent positions?
This will depend on the client. Some may well take the opportunity to offer contractors permanent roles based on their business model
6. My company is based in the US, and my contract is with a UK based company, however all work I'm providing in support of the contract is not based in the UK. How will IR35 affect me?
We would advise that you obtain specialist advice from your accountants however, if you are using a NT tax code then it may be opportune to move to a risk adverse PAYE model.
7. Will I have to work for more than one company in a financial year to qualify to remain as a limited company contractor?
Each assignment will be assessed on its own merit. Working for multiple clients may strengthen your IR35 status however you could find you are inside IR35 on one assignment and outside on the other.
1. Who decides if I am IR35 compliant?
From April 2020, it will be the client’s responsibility to determine the IR35 status for all contractors operating via their own PSC’s
2. What will be the most important factor in determining if a contractor’s company is inside or outside of IR35?
IR35 is a complex piece of legislation and all aspects of the working practices are taken in to consideration so it is difficult to identify just one element.
3. Is there a definitive way to define IR35 status?
Undertaking an ESI (Employment Status Indicator) test based on both working practice and the way a business is perceived will give an indication of potential tax status.
Financial and tax considerations
1. How will IR35 effect my tax payments and wages?
If deemed within scope and you wish to continue to be engaged via your limited company then a new contract will be issued and the rate will be subject to both tax and all NI deductions. NES recommends you speak to your accountant/financial adviser to discuss the potential financial consequences of the changes.
2. Will the agency or the customer be liable for paying NI contributions for the contractor?
If engaged via an agency then relevant deduction from the rate will be made by the agency (NES).
3. Would I be liable for past PAYE tax if I was found to be working outside IR35?
HMRC have stated that then do not intend to seek tax retrospectively.