Proposed changes to IR35 legislation could mean thousands of contractors may pay more tax. With the Government’s consultation on contracting in the private sector now underway, it is important for you to look at how you will be affected if the legislation comes into force from April 2019.
In this article, Paul McDonnell, Director at Crest Plus which specialises in contractor payment solutions, summarises the changes and explains some of the tests involved in finding out if you’re affected.
What do the new rules mean?
The Government’s changes to off payroll working in the private sector, if introduced, would mean the onus is on the contractor’s client to verify their IR35 status.
At the moment, IR35 status is the responsibility of you as the individual contractor to ensure compliance. With the responsibility pushed back to end clients, it is likely that more contractors who operate through their own limited companies, including Personal Service Companies, will be subject to the IR35 legislation. If you are affected, your payments will be subject to PAYE and National Insurance Contributions (NICs), so you will pay more tax and NICs and therefore receive less take-home pay.
Similar legislation was introduced in the public sector last year and many end clients responded by putting a blanket ban on the use of limited company contractors. Limited company contractors had to consider their options, with some managing to negotiate higher rates to compensate for the impact while others left the public sector altogether or joined Umbrella companies instead.
It is not yet clear how end clients will respond in the private sector though the fear is they will follow the same route as the public sector, with many making a policy decision to cease using limited company contractors.
How to prepare
It is possible to prepare for and mitigate the impact of the new legislation?
The key is to understand your contracts and to know where you stand in relation to the IR35 rules.
Of course, contracts vary though there are a number of ‘pressure points’ which crop up in the majority of contracts which may affect IR35 status including:
- Does the contract allow the right to substitution?
A positive indicator for falling outside of the IR35 rules is the right, contractually and in practice, to send another person to fulfil a contract. This demonstrates that you are a company providing a service, rather than being like a regular employee that must attend personally. There may be clauses in your contract relating to providing a replacement should you be unable to attend, if you are ill, for example. If there are restrictions in terms of your right to substitution, it is likely that the new rules will apply to you.
- Does the contract have a Mutuality of Obligation (MOO) clause?
Mutuality of Obligation means that the company you are contracting for (the end client) guarantees future work to you, and you are obliged to accept it. If there is Mutuality of Obligation this could mean, again, that you the relationship is more like that of an employee as the end client is restricting your working options.
- Supervision, Direction and Control
If you are under (or subject to the right of) supervision, direction and control over the way in which you deliver the contract, this is positive indicator of being within the IR35 rules. As independent contractor, you would expect to be able to deliver the contract in your own manner (subject to any commercial agreements).
Lack of awareness
One of the problems we encounter is the lack of awareness among contractors and end clients about contract clauses and how they impact IR35 status. Indeed, we find end clients often don’t understand the legislation sufficiently themselves, so they unwittingly and unnecessarily tie contractors into IR35. Contractors, likewise, do not always know which clauses to check, and while their working practices may be compliant, their contracts suggest otherwise or vice versa, their working practices may differ from the contract.
In some instances, a straight-forward discussion between the end client and the contractor, and a mutually agreeable change to the wording of contracts, will be sufficient for a contractor to fall outside IR35 legislation providing the working practices are consistent with contract.
For others who find they are subject to IR35, there are a number of options, including:
- Continue to work through your limited company but accept that payments will be subject to PAYE/NIC and you will therefore have reduced take home pay.
- Seek to negotiate a higher rate of pay with your employer/recruitment agency.
- Look at alternative working options, such as joining an Umbrella company. While you will still be taxed as an employee if you work for an Umbrella company, you will have other benefits. For example, you will build a record of continuous employment; be entitled to holiday pay and sick pay and have access to a pension scheme.
What to do next
The best way to find out if you’ll be affected is to take expert advice. You can contact Crest Plus to discuss your contract working arrangements on 01244 684700.
About the author
Paul McDonnell is a Director at Crest Plus, one of the UK’s longest-established providers of contractor payment and accountancy services. He can be contacted via email firstname.lastname@example.org or by telephone 01244 684700.
The information in this article has not been written by Caunce O’Hara & Co Ltd or any of Caunce O’Hara’s employees. None of the opinions or views contained within this article are Caunce O’Hara’s nor do we accept responsibility for any financial advice given within the article.
Caunce O’Hara & Co Ltd do not provide Tax advice nor advice regarding Investments. Any commitments are taken solely at the person’s own discretion.
If you would like to speak to one of our IR35 experts about your IR35 status, please contact 0333 321 1403 for details and to book an appointment.