IR35 is the tax legislation that affects contractors such as people working in the construction and engineering fields, technology consultants, interim managers etc.
Earlier this year the Government announced that it would be making changes to the IR35 tax regime for contractors in the private sector. These changes are likely to affect you.
Below we explain the changes to IR35, but first a quick overview of the current system.
IR35 for private sector contractors
IR35 aims to ensure people who do the same job, whether a contractor or an employee, pay the same income tax and national insurance. It’s designed to prevent employers and contractors avoiding tax when the contractor is supplied via an intermediary, such as a limited company.
IR35 applies if the contractor is to all intents and purposes an employee, e.g. if they didn’t operate through the intermediary they would be on the payroll. In this case, when a contractor is deemed to be ‘inside of IR35’, income tax and national insurance must be deducted from the contractor’s pay.
Currently, if you work through an intermediary company, that company decides whether you’re inside or outside of IR35. In many cases the intermediary company is your Ltd company, so you decide. But from April 2020 that changes…
IR35 changes from April 2020
IR35 is actually a set of laws, the first is the Intermediaries Legislation Act (2020). The NICs element of the Intermediaries Legislation is part of the Social Security Contributions (Intermediaries) Regulations 2000, and the income tax element was integrated into the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003).
Then in 2017 the Government rolled out ‘Off-Payroll Reforms’ for the public sector, confusingly this is also referred to as IR35.
The new tax, that comes into force in April 2020, is now known as the ‘Off-Payroll Tax’ and this applies to contractors working in the private sector. The biggest change is that the firm (end-client) you work for will be responsible for determining whether your services fall inside or outside of IR35.
The end-client will need to assess your status based on the following principal ‘tests of employment’:
- Control: what degree of control does the end-client have over what, how, when and where the contractor completes the work
- Substitution: is personal service by the contractor required, or can they send a substitute in their place?
- Mutuality of obligation: mutuality of obligation means the end-client is obliged to offer work, and the contractor is obligated to accept it.
End-clients may determine whether an assignment falls inside or outside of IR35 using the Government’s Check Employment Status for Tax (‘CEST’) tool. You can also use this tool to check your employment status, and to potentially dispute an IR35 determination.
Changes to tax deductions and payments for contractors inside of IR35
Another change is who deducts and pays tax from the contractor’s pay. If an assignment falls inside of IR35, from April 2020 this will be the party which pays the contractor’s limited company (often an employment agency or the end-client).
Of course there are exceptions. If the end-client is a small company this change won’t apply, the responsibility for assessing and paying tax will stay with the contractor’s limited company. To be exempt the end-client must meet 2 of the following:
- Annual turnover of £10.2 million or less,
- No more than £5.1 million on the balance sheet,
- No more than 50 employees.
If an employment company pays the contractor’s limited company, its size is irrelevant.
How does this effect your relationship with Energi People?
From 6 April 2020* if an end-client decides that you fall inside of IR35 we will have to change the way we work with you. You could move to Energi’s contractor PAYE model, work via an Umbrella or receive payments to your personal service company net of income tax and national insurance. If you already work using our contractor PAYE model or an Umbrella company, nothing will change.
* this includes any contracts or payments that continue on or after 6 April 2020
If the end-client determines that your assignment falls outside of IR35, no tax deductions will be made to your contractor pay. It will continue to be your responsibility to pay HMCR.
After April 2020 firms recruiting contractors will decide whether an assignment falls inside or outside of IR35 long before contracts are discussed so you will know exactly where you stand.
What happens if you don’t agree with an IR35 determination?
End-clients must provide written reasons for making an IR35 determination either way. If you don’t agree with it you could test the determination using the Government’s CEST tool (see link above) to explore whether you have a case. Then you can make representations to the end-client stating why you believe the determination is incorrect, and they have 45 days to respond with further supporting reasons or to change the IR35 determination.
Support from Energi
Off-Payroll Tax obviously affects the way we work with some of our clients and contractors, and therefore we’re providing all parties with advice and helping them prepare for the new legislation. We’re identifying any current contracts that continue after 6 April 2020 and talking to end-clients to make sure they’re reviewing these and communicating with us and affected contractors in good time.
Going forward we’ll do what we can to ensure that contractors know the IR35 status of an assignment well ahead of any discussion about contracts, so that you can make informed decisions about the work you engage in.