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Off-payroll working in the private sector – a guide for contractors

IR35 is a tax legislation used to distinguish between employees and genuinely self-employed contractors. Last month we compiled a comprehensive guide to IR35. Now, we take an in-depth look at how the ‘off-payroll working’ rules, introduced to the public sector in 2017, will be extended to medium and large-sized businesses in the private sector from April 2020.

Matt Poyser from inniAccountsBy Matt Poyser, who now writes for Listentotaxman.com on matters relating to contracting and limited company taxes.

Matt is a previous contractor with a wealth of experience and the Director of Client Experience at inniAccounts (an accountancy service tailored for contractors, consultants and freelancers).

Have a question? inniAccounts are happy to help Listentotaxman visitors with any queries,
simply contact them here.

In a nutshell, off-payroll working will shift the responsibility of determining if a contract is inside or outside of IR35 from the contractor themselves, to the end client. Here’s a pragmatic guide to help you navigate the changes set to be implemented in the private sector.

So, what’s changing?

Following a summer HMRC consultation on IR35 reform, Chancellor Phillip Hammond announced in October's budget that he would extend off-payroll working rules from the public sector to large and medium-sized private sector organisations. Off-payroll working has been operating in the public sector since April 2017, it’s designed to ensure service companies are compliant with IR35.

To give businesses time to prepare, the change will not be introduced until April 2020 and to ease the administrative burden small organisations will be exempt. Only medium and large companies will take on the change.

IR35 itself hasn’t changed, but from April 2020, the responsibility for determining your IR35 status will shift from you to your client (if they’re a medium or large business). If your contract falls within IR35, your client (or agent) will deduct tax and National Insurance for you and pay the net amount to your company directly. Client’s must ensure that they make decisions based on your individual circumstances and accurately assess your IR35 status. You can challenge the decision if they get it wrong.

After 20 years of IR35, as larger companies assume this new responsibility, the uncertainty around contract status will be reduced for many contractors. With the right education and support, HR teams and legal experts will be able to accurately evaluate the status of the contracts they need to fill. A contractor’s decision on whether to accept a contract or not should become clearer. Overall these changes should provide greater transparency and certainty around your IR35 status.

Why is this happening?

This change is merely about tightening up on non-compliance. HMRC believe that approximately one third of those working through their own company should be inside IR35. But that of this third, only 10% are correctly identifying their IR35 status. By making the end-client responsible for determining the status, HMRC hopes to improve compliance and ensure those inside IR35 are paying the right amount of tax and National Insurance.

It’s important to remember that IR35 itself remains unchanged. If you (and your client) have confidence in your status, the announcement shouldn’t affect you. HMRC recognises that two thirds of engagements through personal service companies are correctly outside of IR35 and will continue to do so. It’s estimated that at least 80% of IT contractor’s will remain outside of IR35.

How will the off-payroll rules be implemented?

From April 2020, you will no longer determine your IR35 status yourself. Instead, your client will examine your contract, determine the status – they then must inform you of the outcome before you start working.

The government has made it clear that blanket decisions will not be permitted. Businesses need to consider each contract individually and ensure they’re making the right decisions; they can’t be overly cautious and declare you inside IR35 just to keep things simple. The Met Office recently fell foul of this when a contractor challenged his inside IR35 status and received £9,500 in tax and National Insurance that shouldn’t have been deducted. At any time, you can ask your client for the reasons behind their decision in writing.

Once you’ve both reached an outcome you agree on, if you’re outside IR35 it’s business as usual. If you’re inside, your client (or agent) will collect tax and National Insurance on your behalf and pay your fee net of these deductions.

What’s being done to help the rollout?

Rollout to the private sector was originally planned for April 2019. However, the findings and response of HMRC’s consultation highlighted a number of challenges that have taken place during public sector rollout. The decision was therefore taken to delay until April 2020. This delay will hopefully be used to deal with some of the problems surrounding the implementation.

HMRC plans to publish online guidance and support organisations in the private sector to address the identified challenges. Their aim is to help companies make decisions on employment status with confidence. They’re also planning to publish suggestions to help contractor’s if they disagree with their client’s status decision. HMRC’s CEST tool (developed to assist engagers in checking employment status) has been criticised for lacking in functionality and usability. HMRC have announced their plans to continue to develop this tool.

Is it still possible to work outside of IR35?

Of course. HMRC recognise that at least two thirds of those employed through their own personal company will legitimately be working outside of IR35. It’s worth taking a look at the impact of the off-payroll rules in the public sector. After some initial hiccups, today many contractors work outside of IR35; even HMRC uses contractors outside of IR35 for its internal projects.

Remember, there’s nothing wrong with operating inside IR35, if you chose to accept such a contract, so long as you’re correctly identified and paying the correct levels of tax and National Insurance. Being able to flexibly accept contracts from across the public and private sector, both inside and outside of IR35 is a great way to ensure you’re working on the most interesting projects and continually have a competitive edge.

Is working through a limited company still the best option?

There’s two simple questions to ask yourself: will any part of your work, now or in the future be outside IR35? Or will you ever work for a smaller business? If so, then using a limited company is still the most cost and tax efficient way to operate.

If, however, you think all of your work in the future will be inside IR35 for medium and large clients, then the case for operating a limited company becomes more marginal. While you never need to worry about being caught by IR35 with an Umbrella, you will be missing out on some of the available tax planning opportunities of a limited company.

Next steps

Now is the time to build on your IR35 knowledge to ensure that you and your clients are ready for April 2020. Be sure to take a look at the IR35 guide written by INNI Accounts and their eBook to help you get started. IR35 may well be new territory for your clients, so you have a great opportunity to become a helpful guide for them going forwards. Consider engaging with your client and agent sooner rather than later to confirm your current or any upcoming contract’s IR35 status. If you’re outside IR35, ensure that your working practices clearly reflect this, especially in terms of supervision, direction and control and ensure that your client understands what this means in practice.

Matt Poyser from inniAccountsBy Matt Poyser, who now writes for Listentotaxman.com on matters relating to contracting and limited company taxes.

Matt is a previous contractor with a wealth of experience and the Director of Client Experience at inniAccounts (an accountancy service tailored for contractors, consultants and freelancers).

Have a question? inniAccounts are happy to help Listentotaxman visitors with any queries, simply contact them here.

This article was published in our Guides section on 30/11/2018.

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