In July 2019, HMRC published proposed changes to the application of IR35 legislation. The changes announced have caused concern and confusion to a lot of contractors.
For example, many contractors will no longer be responsible for determining their IR35 status. The responsibility for this will fall to the end-hirer, i.e. the organisation who the contractor is completing work for. Some contractors worry that the end-hirers will apply blanket decisions when deciding if a contract is inside IR35 or not to avoid risk.
To help soothe some of these concerns, we’ve asked one of our expert accountants, Dan Knowles, about the reforms. Here, Dan gives background to the IR35 changes, how they might affect you, and what you can do in preparation for the changes.
Hi Dan. Could you please give an overview of what the changes are in the private sector?
“The responsibility for determining the IR35 status of private sector engagement will shift from the contractor to the end-hirer. The changes won’t apply where the contractor engages with a small company.
After your IR35 status has been determined, your end-hirer must provide you with a Status Determination Statement. Essentially a document that will explain why they’ve made their decision.
If your contract is deemed to be inside IR35, your fee payer is responsible for deducting the correct amount of income tax and National Insurance from the payments they make to you. They will pay these directly to HMRC. To make things clear, the fee payer is the organisation that makes payments to your limited company.
If your contract is deemed to be outside IR35, and this decision proves to be incorrect, the entity that made the assessment will be liable for any income tax and NI that should have been deducted.”
Why is there so much controversy around the changes?
“There’s currently a fear and belief that end-hirers will apply blanket decisions on a contract’s status to avoid risk. Basically, that contracts will be deemed to be inside IR35 by default.
And even though deductions will be made for income tax and National Insurance, you won’t have employment rights conferred to you, unlike permanent workers.
Currently, private sector contractors caught inside IR35 can use a 5% expenses allowance. From April 2020*, like those in the public sector, this will no longer be available.”
Could you describe how this is going to affect contractors?
“Firstly, private sector contractors will no longer bear the responsibility of determining the IR35 status of an assignment.
And if your contract is deemed to be inside of IR35, you won’t have any payments to make to HMRC for income tax and National Insurance. As I said, these will be deducted by your end-hirer or agency before you are paid.
If the end-hirer is a small company, there will be no change. The responsibility for applying the IR35 legislation will remain with the contractor and the 5% allowance will remain.
In terms of the end-hirer’s responsibility, blanket decisions shouldn’t be made. Individual contracts and circumstances need to be considered. End-hirers must take reasonable care when making the assessment.”
What advice would you give to contractors in the private sector in preparing for the changes now?
“Take advice on whether your contract is inside IR35 now. The best way to do this is by having your contract reviewed.
The underlying factors that determine the IR35 status of an assignment isn’t changing. So, if the contract is likely to be outside IR35 now, it should be when the end-hirer makes the decision.
If you disagree with the decision made by the end-hirer, tell them why! They will then have to review the decision and either explain it further or provide an amended Status Determination Statement alongside a revised decision.”
Here to help
Do you need to know more about how the 2020* IR35 reforms will affect you? Let us help you. Call us on 01253 843182 or fill in the form below and we’ll be in touch.
* Update: at the time this article was written, the off-payroll (IR35) reforms were due to be implemented on the 6th April 2020. On the 17th March 2020, the UK government announced that it would be deferring the reforms to the 6th April 2021 to help businesses and individuals during the COVID-19 crisis.