A month on from the end of the Government’s formal consultation on proposed changes to off-payroll in the private sector, and its time to consider the proposed changes, how these will affect you as a Limited Company contractor, and what you can do about it. The changes are likely to have a significant impact on some (not all) Limited Company contractors when they come into effect on April 2020.
What off-payroll changes have been proposed?
The changes to off-payroll in the private sector have been proposed as the Government wants to “increase compliance in the private sector” with the IR35 rules. Under the proposals, the end hirers (organisations you carry out work for) would become responsible for determining whether you are inside or outside IR35. Until now, that responsibility has rested with you as the contractor, rather than your end hirer or recruitment agency.
It’s important to remember that none of the criteria for determining IR35 status, (such as Control, the ability to substitute and a lack of mutuality of obligation) will be changing. If you are not inside IR35 now, you won’t automatically be inside IR35 in April 2020. The proposed changes are in relation to who is responsible for determining the IR35 status and, potentially, for the underpayment of tax.
How does this effect my contract or the assignments I am offered?
In some cases, end hirers may provide individual IR35 assessments and be comfortable with the responsibility for determining IR35 status, in which case, provided they agree that your assignment is ‘outside the scope’ or ‘not caught’ then your current arrangements would not be impacted.
However, though end hirers have been told each assessment should be done on an individual basis, they may decide it is too difficult to assess all contractors accurately, so could try and make a blanket assessment which assumes all contractors are inside IR35. The effect of this is that contractors would face the possibility of increased tax bills – being taxed at employed rates, despite properly operating as a business, and expecting to pay tax as a business too. This was the case when similar rules were introduced in the public sector in 2017. If the same happens in the private sector, many more contractors could find themselves severely out of pocket.
How does your IR35 status is being decided by HMRC?
HMRC and the government recommend that the end client or agency uses the CEST (Check employment status for tax) tool and that “HMRC will stand by the result given unless a compliance check finds the information provided isn’t accurate”. Despite criticism of the accuracy of the results provided, including the lack of one of the keys Outside IR35 deciders, (lack of mutability of obligation), HMRC will push to enhance and improve the tool before April 2020.
Treasury minister John Glen MP confirmed that:
Enhancements will be tested and rolled out before the reforms are introduced in 2020” and HMRC has held user “research sessions,” and will work with affected parties “over the coming months” to ensure the tool can “suit the needs of all sectors.
What can I do now?
Though April 2020 may seem in the distant future, it’s important to look at your options as soon as possible. Speak with your end-hirer or agency when you agree new contracts and extensions to ensure they are able to operate in the same manner. Ask them if it’s their intention to insist that limited company contractors move to their payroll and become subject to PAYE? Or will the end hirer take responsibility for determining your IR35 status allowing you to continue to work via your limited company? It may be that they do not know at this stage, but at least you can find out when they will be able to address the issue with you. Other options to consider would be taking a full-time position with the end client, operation through an umbrella company or continuing to offer through your Limited Company paying tax through your end client’s PAYE scheme. Either way operating as a limited company contractor will remain most beneficial for you and the end client if you are outside of IR35.
When considering which option may suit you best, it’s important to get detailed pay illustrations to show all the deductions and tax payable for the different ways of working, so that you know exactly what to expect.
Now that the formal consultation on off-payroll in the private sector has closed, we expect to see the proposals included in the draft Finance Bill this summer, with a final announcement in the Chancellor’s Autumn Statement. We will keep you informed as the proposed off-payroll working rules become clearer.
In the meantime, if you wish to clarify any aspect or would like to discuss the changes with one of our expert contractor accountants, please get in touch on 0800 7569786 or direct with your dedicated accountant.
Additional Information and HMRC release: Off-payroll working rules from April 2020.