Contractors, get ready for the private sector IR35 roll-out
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We currently look after approximately 30,000 freelance and contract clients from a wide range of market sectors, including: IT, energy, creative media, engineering, rail, construction, recruitment, management, consultancy, health and wellbeing, public sector and other private sector professionals.
Our mission is to provide our contract clients with the best level of cover that enables them to plan for the unexpected, feel protected and thrive in their professions.
So it has been with a heightened interest that we have been following the IR35 debate, arguements and concerns over the past couple of years.
The roll out of IR35 into the public sector has caused a lot of issues for contractors, recruitment agencies and umbrella companies alike.
A study conducted by the CIPD and IPSE found that 51% of public sector hiring managers thought they had lost skilled contractors because of April 2017’s changes to the IR35 rules, with 71% also saying they were facing challenges retaining their exisiting contractors.
Some high profile IR35 tax investigation cases have resulted in contractors being issued with demands for back-taxes running into hundreds of thousands of pounds. In many cases those contractors were assured their status was safely outside IR35 only to find that their status is viewed as being very much ‘inside IR35’, resulting in them owing unexpected back-taxes to HMRC.
Inside or Outside of IR35 in a nutshell
If you are working inside IR35, you should be paying employed levels of tax. If you are working outside IR35, you may choose to pay yourself using a combination of salary and dividends.
Whether or not you are inside the legislation is the most pressing question and one that has caused much heated debate and posturing.
Principal tests of employment
Many contractors are still in the dark as to whether or not they are working inside IR35 and simply do not know how to gain confirmation either way. In short, IR35 involves applying three principles to determine the contractor’s employment status.
- Control: What degree of control does the client have over the worker – what work they do, how they do it and when they complete it?
- Substitution: Is ‘personal service’ required, or can the worker send a substitute in their place? If there is no right of substitution it can be argued that the contractor is providing a personal service and are an employee. This is a very important factor in determining IR35 status.
- MOO (Mutuality of Obligation): This is where the employer is obliged to offer work and the worker is obliged to accept it. HMRC’s definition of MOO can be found in its Employment Status Manual.
HMRC’s CEST tool was created to make determining IR35 status easier, but has been met with much derision and accusations of it being weighted towards the contractor being found to be working inside IR35.
Regardless of the campaigning against IR35 and the myriad of press articles in the system, in the eyes of the Government it is achieving its primary target. That is to combat tax avoidance by workers who supply their services by an intermediary, such as a limited company, and in-turn increase the amount of tax that HMRC can bring in to the Government coffers.
To this end, it is now expected that any private sector changes will be announced in the Autumn Budget with legislation going live in April 2019.
It would certainly be deemed unfair in the eyes of public sector workers if IR35 wasn’t introduced to the private sector. Yet on the flip-side, it is important to remember that freelancers and contractors do not receive the same levels of benefits that an employed workers does.
Freelancers and contractors do not receive a company pension or holiday pay, nor do they have their National Insurance paid for them. They do not receive sick pay, maternity leave or paternity leave, and are constantly under the pressure of an uncertain monthly income.
Whatever your contractor status is deemed to be there is still a lot to be positive about as a contractor and there are many ways contractors can ready themselves in advance.
In an article we published in May 2018, we highlighted a few things that private sector contractors could consider so they are fully prepared for the IR35 roll-out:
Review your current working practices
Contractors can change contracts and working practices so that it is more likely they will pass the IR35 test. If you plan to do this, you should review and make any necessary changes now as you may not be able to make any changes come next April.
Whatever changes you make would need to be weighted towards passing the IR35 test. As with any changes to contracts and agreements, it is best to consult legal advice first to ensure the changes you plan are sound in the eyes of the law.
It would be counter productive to make changes to pass the IR35 test, only to find you contravene another law or regulation in the process.
Consult your accountant
As insurance brokers, we cannot advise you regarding your financial status nor about the tax implications of being deemed to be working inside IR35, but your accountant should be able to. Failing that, consulting legal advice would also be advisable.
Join an Umbrella company
A large proportion of freelance workers from the public sector, who failed the IR35 test in 2017, joined an Umbrella Company. This could very well be a popular route that private sector contractors opt for as well.
If you are subject to a tax enquiry it could take a long time and cost you a lot of money in the process. A Tax Enquiry and Legal Expenses insurance policy will provide you with cover for representation costs in the event of a HMRC investigation.
The cover will also provide you with access to helplines to guide you in IR35 issues, taxation, legal advice, business law and counselling should you need them.
For further information please contact our award-winning Schemes team today on 0333 321 1403 or email firstname.lastname@example.org
Whatever happens regarding IR35 between now and April 2019, there promises to be plenty more debate and lot more twists and turn in the saga.