IR35 covers the off-payroll working rules. Contractors and freelancers are often the ones covered by these rules, and recently the government released some changes to the IR35 regulations that will have impact on some businesses, especially medium and larger sized ones.
Its important to note that, whilst the changes were due to take effect from the new tax year, this has now been changed to April 2021 in light of the Coronavirus crisis. Despite this, we thought it still pertinent to put together a handy guide to the changes, to ensure that you stay compliant and understand how the pending changes may affect you and your business.
Over the past couple of years, the government has been releasing stricter rules governing those who fall under IR35. This new set of employment rules is likely to increase the amount of tax around 170,000 self-employed workers will have to pay.
In the past, IR35 has allowed those who work in the private sector, such as management consultants, to pay less tax by setting themselves up as a private company.
The key change to highlight is that it will now be the client that will determine whether a contractor’s work falls inside IR35 rules. This is consistent with what’s been happening in the public sector since 2017, and takes the decision out of the contractor’s hands somewhat.
As well as this, the Chancellor released some other important changes and information regarding the new IR35 rules.
End Client Submission
For any contracted work, whether that’s an IT consultant, management consultant or other, the client is responsible for confirming the IR35 status through the production of a Status Determination Statement (SDS). This statement will determine the status of the contractor. In the case of a dispute, this is also led by the client, with further details set to be released about this process.
Small Businesses are exempt
As mentioned previously, the new rules will affect medium and large sized businesses. Small businesses with an annual turnover of less than £10.2 million will be exempt and will therefore not have responsibility for determining the IR35 status of a contracted piece of work. The small business must also not have more than 50 employees or have a balance sheet total of more than £5.1 million. Small businesses are defined by the parent company only, therefore preventing any subsidiarises to be set-up in order to procure consultants. As is the case now, there is no small business exemption for the public sector.
Employment Tax Liabilities can be transferred
There may be a few stakeholders in the procurement of a contractor. For example, there could be the end-client and an agency involved. With the new regulations, HMRC are trying to ensure compliance across all parties, to avoid the abuse of any potential loopholes. Therefore, if there are tax liabilities to a contractor, HMRC have the power to recover the tax from a relevant person, which can be anyone involved in the payment to a contractor.
Administration Allowance has been removed
Currently contractors have a 5% allowance, which is there to meet the costs of administering the off-payroll working rules. Whilst this will remain for those working with small businesses, this will be taken away for any contractors working with medium and large businesses.
So, whilst the IR35 changes have been delayed for at least another year, there is still cause for concern for medium and large sized businesses, and especially contractors. Increased employment liabilities and tax payments mean there will be drastic changes. It will also be interesting to see how businesses respond to the additional responsibility placed on them to determine the IR35 status of those they contract to work on projects.
If you’re unsure how the new IR35 regulations will affect you and your business, get in touch with the friendly team at iFinance Department. Our experts have the full knowledge of the regulations and will be able to provide you with independent and clear advice about your options and how IR35 might affect you.