IR35 reform: What could it mean for you?
The Autumn budget at the end of October contained a controversial announcement for self-employed contractors: IR35 tax legislation is to be extended to the private sector from April 2020.
This follows on from IR35’s introduction to the public sector in 2017, forcing contractors who work through their own business but are employed by a third party onto the payroll, effectively paying the same taxes as permanent employees.
So, in a nutshell, if you’re a self-employed contractor who supplies your services to a private sector client via an intermediary, for example a limited company or personal service company (PSC), you may be paying more tax in the future.
What could this mean for contractors?
It’s thought these changes could affect up to 2 million contractors, many of those working in engineering or tech.
There are fears that the net income of an average contractor who works via a limited company could be slashed by up to a quarter. This is taking into account extra income tax and National Insurance contributions.
It’s worth bearing in mind that the Chancellor announced, also controversially, that the IR35 reforms proposed will only apply to large and medium-size businesses you may work for - essentially not companies with less than 250 employees or a turnover not more than €50m. A two-tier system adds additional complications to an already difficult situation.
Are you ‘inside IR35’?
It will be the responsibility of the organisations hiring you to judge if you really are a self-employed contractor, or should be treated as an employee and put on payroll, paid through PAYE.
The test is whether your roles and responsibilities as a contractor or freelancer working through an intermediary are the same as that of a permanent employee.
Because the liability will be on businesses to assess contractors’ tax status, experts worry that when the reforms are introduced many private sector firms may become risk-averse about engaging freelancers or contractors - even if legally they are eligible to stay off-payroll.
There’s also concern that alternatively, many employers may err on the side of caution, insisting all contractors be put on payroll whether or not they meet the conditions for IR35.
There’s time to prepare
These chances don’t come in until April 2020, which gives contractors and businesses time to prepare.
The Treasury is due to publish a draft Finance Bill legislation in Summer 2019 when the final details will be known – and at RHL we’ll be publishing more advice in future months.
But in the meantime here are three actions to consider:
Understand your current status. Chances are, you already know your IR35 status (you can take a free online test here). But as these reforms approach having a deeper understanding will become even more crucial. If necessary, consider getting an IR35 review from a tax specialist.
- Talk to end clients now. Opening dialogue early will put you in a better position to know how things will be managed.
- Build up a portfolio of evidence. If you’re not already, start gathering evidence that shows you’re treated differently than a permanent employee hence should be outside IR35 (for example, contract reviews, emails and invoices). This will also make it easier for your clients to assess your status later on.
- And finally, talk to us here at RHL. If you have questions or concerns about how the IR35 reform might affect you further down the line, feel free to get in touch for a chat and guidance.