Feeling confused about IR35? Who could blame you.
IR35 can be a minefield, and create some hefty changes in the way you get paid. HMRC are still bringing in updates, but we will try and clear a few things up for you here.
Back on 11th July 2019, the government published a draft Finance Bill, which introduced some vital changes for workers in the private sector.
This is also known as "off-payroll working" aka "IR35".
If you work regularly with the same companies and provide a service, you may well have had your ears buzzing about the new IR35 rules coming in as of 6th Apr this year.
Next week the chancellor will confirm what those changes are.
What we do know
Changes are due to take effect from 6th April 2020
7th February 2020 HMRC published an amendment to the implementation of the rules, clearly stating that changes will only apply to payments made for services provided by PSCs (Personal Service Companies*) on or after 6th April 2020.
The legislation applies only to ‘medium or large’ businesses
There is an exemption... for ‘small businesses’ as defined by the Companies Act 2006 that meeting two or more of the following criteria:
Annual turnover is no more than £10.2 million
Balance sheet total is no more than £5.1 million
No more than 50 employees.
Where the end-client meets two or more of these criteria, responsibility for determining the IR35 status of a contract remains with the PSC and the changes do not apply.
Who determines IR35 status?
The end-client must confirm the IR35 status of a contract by providing a ‘Status Determination Statement’ (SDS). The SDS must be supplied in writing directly to the PSC worker and a copy to an Agency if the Agency responsible for paying the PSC.
What does that really mean? For the most part that most of the responsibility for determining an SDS is on the end-client and/or the fee payer (if an Agency is involved).
What's the point?
Putting it bluntly IR35 was created to make sure that freelancers and companies aren't getting out of paying employers national insurance and darting off the payroll.
The changes now mean that the end client is ultimately is responsible for any employment tax liabilities arising.
But wait - not only that. The new legislation also means HMRC have the right to recover tax liabilities from another ‘relevant person’.
Who is a "relevant person" Good question - a relevant person is any party involved in the payment to a PSC. This means HMRC retain the right to go up the supply chain and can cover tax from the highest part NOT complying with IR35 rules. So, yes... the big companies are dotting their I's and crossing T's now on this one as it could lead to a lot of penalties.
What effect does this have on me ££ ?
It means that if you are supplying a service to a company you may well be issued with a SDS, and need to go "on payroll". You will need to take a good look at your contract, your tax status to determine what change that means in your take home pay. A very rough guide is that you should look to increase your day rate by about 20% if possible.
The good news is an impact study has shown that in the public sector about 25% of contractors were able to negotiate an increase in their day rate. Time to hone those negotiation skills.
Checking your status
Is their job - the problem is however, what will HMRC accept as a check?
This gets a bit tricky.
HMRC have created a checking tool called, Check of Employment Status Tool (CEST). However, they have said that this does need some updating, and have previously challenged the determination of their own software - so it is worth being extra careful to fill these out.
If you have any questions at all, get in touch with us and our tax consultant Katie to help you ensure you're getting the right deal.
* What is a personal service company (PSC)? A Personal Service Company or ‘PSC’, is usually known as a limited company which has been set up to provide the services of a single contractor who is likely to be the sole shareholder and company director of the business. HOWEVER confusingly... PSC also stands for Persons of SIgnificant Control - so what out for which one you're using.