IR35 off-payroll rules are changing – how will you be affected?

From April 2020 the IR35 rules for off-payroll working are changing, and will affect you if you’re a contractor working through a Personal Service Company (PSC). The change in legislation will also impact medium and large businesses in the private sector that hire contractors.

IR35 is a complex piece of legislation that has previously been navigated by contractors and PSCs, but the focus for decisions on employment status now moves to their end-clients. It’s a drastic change to a system that was already regarded as troublesome, and the changes have serious implications if you’re a contractor or private sector business hiring contracting assistance.

So if you’re affected by IR35 changes, what can you expect?

Determination of employment status

After April 2020, medium and large organisations in the private sector that hire contractors will take responsibility for determining the contractor’s employment status – i.e. whether they fall inside or outside of IR35 rules.

Previously, it was the contractor’s Personal Service Company that made the judgement, so this important decision is now in the hands of clients in many instances. This has been the case for some time when working with public sector clients, but the inclusion of a large part of the private sector has caused some consternation among contractors.

If a contractor works with small business clients in the private sector, however, the situation doesn’t change and the PSC continues to determine employment status for projects. Small businesses aren’t affected by the changes, and if you meet two of these three conditions you’ll be regarded as a small business.

• You have a turnover of £10.2 million or less
• You employ 50 members of staff or less
• Your business has £5.1 million or less on your balance sheet

How will you be affected by the change in off-payroll rules?

Contractors

If you’re a contractor you could face higher tax bills if your end-client decides you fall inside IR35 rules. It might result in you paying the same tax as the employees of your client, without the safeguards that employment brings.

You may need to increase your fees if you work for several private sector medium or large clients, as your net pay will reduce due to the extra tax liability. Some clients could decide that all contractors they hire fall inside IR35 for the sake of simplicity, or to prevent costly errors in judgement.

There’s also potential for HMRC to investigate decisions you’ve made in the past regarding your employment status in previous contracts, possibly leading to hefty tax bills.

End-client organisations

Private sector end-clients take on significant responsibility in judging whether a contractor falls within off-payroll working rules. Furthermore, the technology provided by HMRC to help them has been criticised for being too simplistic.

Contracts are often complex arrangements in these situations, and the CEST (check employment status for tax) tool has been viewed as unreliable by some. It’s going to be updated by HMRC, however, so hopefully the situation will improve in this respect.

End-client employment costs may also increase as a result of the changes, as they’ll be liable for employer NICs if they determine a contractor falls inside IR35. They’ll have to measure this against the potential for HMRC scrutiny if they judge a contractor to be outside the rules.

If you’re affected by the IR35 off-payroll rules, the support of a qualified accountant can be crucial in controlling your tax liability and potential for HMRC investigation. Accountants understand how HMRC operates in situations such as these, and can communicate on your behalf to prevent costly mistakes.

Handpicked Accountants will put you in touch with qualified accountants in your area – please contact one of the team to find out how we can help.