As a limited company contractor, you’ll probably be familiar with the IR35 legislation. Whilst IR35 has been around since 2000, changes were made to its application in the public sector in 2017. During summer 2019, draft legislation was also published for similar reforms in the private sector to come into force in April 2020*.
What about the application of IR35 changing?
The April 2020* reforms bring the private sector and public sector in line. Whilst the IR35 legislation itself isn’t changing, the responsibility for determining the IR35 status of an assignment shifts from the the limited company contractor to the end hirer utilising your services (except when the end hirer is classed as a small company, in which case determining your IR35 status remains your responsibility). There are other important changes that will apply to both the public sector and the private sector. For more information please see our blog post on the reforms.
In the pre-election campaigns, the Conservative party, following other political parties, promised to review the incoming IR35 reforms by mid-February. We know now that the purpose of this review is to ensure a “smooth and successful” implementation, not to consider delaying or cancelling the incoming changes as many were hoping. At this point in time, we don’t know what their intentions will mean in practice. However, they have promised to engage with key stakeholders from the contractor and business community and take on board lessons learned from the public sector implementation back in 2017. As the UK’s leading provider to the contractor market, we will be contributing to this review in full, representing the view of tens of thousands of contractors across the UK. In the interim, it is wise to assume the reforms will go ahead as planned.
Some end hirers in the banking sectors, such as HSBC, Lloyds and Barclays, have already taken a blanket approach, announcing that they will not be utilising contractors operating through Personal Service Companies going forward. Despite this, we have also seen a large number of end hirers not taking a blanket approach, recognising the importance of using limited company contractors in their business model. Many agencies and end hirers are working with specialist IR35 advisors like ourselves to ensure they can continue to engage limited company contractors on an outside of IR35 basis as before. Many businesses are realising that it is perfectly possible and legal to successfully manage the IR35 reforms with the right support and guidance. We believe that limited company contracting still holds a very important place in the UK economy, as well as in the lives of the individuals who have chosen to provide their specialist skills through their own companies, over traditional employment.
What does this mean for you?
Where the assignment is assessed as inside IR35, the ‘fee-payer’ (the organisation that makes payment to the personal service company and which is often an agency) will become the ‘employer for tax purposes’. The fee-payer becomes responsible for making PAYE tax and NI deductions at source before making payment to your limited company.
You will not pay corporation tax on the income from this contract. Your accountant must be made aware of the IR35 status of the assignment so they can account for it accurately.
What should you do now?
The underlying factors that determine the IR35 status of an assignment are not changing. If your assignment has been assessed as outside IR35 prior to April 2020*, it should still be outside IR35 post April 2020*. If organisations are assessing contracts fairly and correctly, there is no reason this should change to your IR35 status.
Communicating with your end hirer is essential. You need to know what their approach to the reforms will be and how this will impact you. Nixon Williams is here to support you through the changes. Our expert IR35 team is on hand to assist you with IR35 reviews where your status is in dispute. If you would like our help, please let your accountant know and we will happily support you.
Lessons from the Public Sector Reforms in April 2017
When the reforms were introduced in the public sector in April 2017, organisations were given very little time to prepare. This caused many public sector organisations to take a knee jerk reaction, such as blanket assessments and bans on limited company contractors. This meant many contractors were simply assessed as inside IR35, without a fair or accurate review of their IR35 status. This resulted in public sector bodies struggling to fill critical roles and disruptions to key projects.
Thankfully, as the public sector bodies have grown more familiar with IR35, and realised that the changes are manageable, we have seen more contracts offered on an outside IR35 basis. In many cases, our IR35 specialists have been helping the public sector agencies and bodies successfully manage the IR35 reforms.
It is important to keep this in mind, that despite a period of uncertainty for contractors in the lead up to April*, we have been here before and are here to help. Be wary of making rash decisions. Now is not the time to simply close your limited company down.
What are my next steps?
Whatever the policy of your end hirer, as your accounting partner, we at Nixon Williams are here to support. We can assist with IR35 reviews, advise on closure or dormant options for your limited company and introduce you to Parasol, our market leading umbrella company and founding member of FCSA. Your accountant is well placed to advise you further, if you have any questions please do get 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.