IR35: What does it mean for you?*
Tax Tyne is a freelance firm offering Tax and Accountancy Services. Based in Newcastle upon Tyne we serve clients locally and nationally. This post looks briefly at the new reforms in IR35, which are due to come into effect from April 2020, and what impact if any they can have on you.
What is IR35?
IR35 (Inland Revenue 35) is a piece of legislation which came into effect in April 2020. The aim of this legislation was to ensure that contractors (this includes Locum Doctors, Pharmacists, Dentists, etc) who do the same work as employed individuals pay the same amount of Tax and National Insurance (N.I) as those employed workers. It was to ensure that any “disguised employees” who were contracting their employment via a Limited Company pay the same amount of Tax and N.I as those who were employed directly with the client.
Why is this being reformed now when its been in place for 20 years and what are the changes?
Working via a limited company can be tax efficient for both the contractor (as they are able to extract profits in various ways such as income and dividends in a manner which is tax efficient for them, as well as claim expenses such as mileage that regular employees wouldn’t be able to claim) and the client (they wont have to pay any employers N.I and also wont have to pay any holiday pay, sick pay, etc) but it is costing HMRC as they are losing out on tax that would be normally due had the contractor been employed. Over the last 20 years IR35 has rectified some of the shortfall but there are still a large number of contractors/clients that are engaged into working practices using limited companies as intermediaries.
Initially there were different rules for contractors who worked for clients in the public sector and the private sector. For those who worked in the public sectors, the responsibility to assess whether a contractor was within IR35 was with the end client and if they found a contractor to be within IR35 they would have to deduct tax via PAYE, as with all their employed members of staff. For those contractors who worked in the private sector, the responsibility was with the contractor to assess their liability for IR35.
The new reforms mean that regardless of whether the contractor engages in the public or private sector, the responsibility is with the end client to assess whether the contractor is within IR35. This applies to medium and large companies only (so small companies are currently exempt from this). The new reforms also only apply to payment for services provided on or after the 6th of April 2020.
Factors affecting IR35
There are various factors which can determine whether a contractor should be inside IR35 (and therefore pays tax and N.I as an employee would) or outside IR35 and some of these factors are:
Level of Control the Contractor has
Substitution/ Personal Service
Risk to the Contractor
Mutability of Obligation
There are many other factors which need to be considered as well.
What to do next?
Whether you are a contractor or a client, get in touch with us and we can go through with you in more detail how IR35 may impact you and your income.
*the information provided in this article is summarised and correct at the time of writing. For details relating to your own circumstance please get in touch as the information provided here may not be applicable to your own circumstances.