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IR35 & Self-Employment: What you need to know

Written on 27-Jun-2019

The ‘off-payroll working rules’ or IR35 became law in 2000. It was introduced to crack down on freelance contractors who had incorporated themselves into a Personal Services Company (PSC) to take advantage of tax benefits but were still considered to be an employee… otherwise known as being a ‘disguised’ employee.

The UK Government believes less than 10% of PSC’s who should comply with the IR35 legislation currently do so, at a cost of more than £1 billion in unpaid taxes and National Insurance.

Companies in various industries are now making the decision to stop working with PSC’s completely when the legislation comes in, which would make it difficult for ‘self-employed’ Chefs to find work if the same thing happens in the hospitality sector.

Generally, the liability for getting the IR35 assessment wrong sat with the PSC until HMRC made changes for the public sector in April 2017…

What is going to change?

It is proposed that in April 2020, similar changes will be made to the private sector to stop the apparent tax abuse by companies engaging with disguised employees and paying them as self-employed.

However, the method for determining IR35 status isn’t changing. The main change is the responsibility and liability for making the wrong assessment.

When the legislation changes are made, responsibility for determining the IR35 status of a PSC will move to the company that engages with the PSC, aka the hirer.

The assumption is that it will be up to the fee payer, often a recruitment agency, to ensure the correct deductions and charges are made as long as everyone in the supply chain fulfils their responsibilities.

HMRC will be clamping down on hirers that aren’t taking reasonable care when setting the IR35 status and the liability will be transferred to these businesses, whether they are the fee payer or not.

In some circumstances it is possible for the liability to move up the supply chain, so it’s important that you choose a reputable agency that understands the legislation so that you don’t end up being stung by the tax man. The cost of working inside IR35 is so significant to contractors that the very least you want is a fair review of your working arrangement.

What is the difference between being inside IR35 and outside IR35?Gov IR35

To be inside IR35 means that you are considered, for tax purposes, an employee to the end client. However, if you are operating outside IR35 it means you are operating as a genuine business and outside of the rules. Essentially this means you are able to pay yourself a salary and remain responsible for your own taxes.

Even if you are operating outside of the legislation, there is still a chance of an IR35 enquiry from HMRC. If a contractor and employee are the same in how they are treated but one is paid via their PSC, they should be deemed to be inside IR35.

Can small companies ignore this?

The government is proposing to apply the changes to all businesses which are not small under the Companies Act 2006 definition – this means firms with turnover of less than £10.2 million, assets of £5.1m or less and fewer than 50 employees. However, it must be the end-user, i.e. the client using the PSC’s services, which is small.

Anti-avoidance measures will be implemented in the final legislation to counter any arrangements designed to bypass the legislation, such as partnerships and public sector entities.

What can you do to prepare?

Whilst we are not qualified to offer professional advice on this topic, we have teamed up with an IR35 expert, Stephen Outhwaite of Outhwaite Associates, who is happy to offer assistance and professional advice.

 The draft legislation is expected to be published by the Government on July 11th 2019. If you would like any information, please contact us today.

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