IR35 and private sector contracts - everything you need to know

*Please note the information in this article may be out of date

IR35 is a tax legislation used to distinguish between employees and genuinely self-employed contractors. 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.

An introduction to IR35

This Guide was written by Patrick Gribben, contractor and freelancer Tax Expert at Intouch Accounting. Patrick now writes for Listentotaxman.com on matters relating to contractor and freelancer tax. He and his colleagues are very happy to speak with Listentotaxman visitors to discuss any tax questions they might have – just visit the Intouch Accounting website for contact details.

This Guide was written by Patrick Gribben, contractor and freelancer Tax Expert at Intouch Accounting. Patrick now writes for Listentotaxman.com on matters relating to contractor and freelancer tax. He and his colleagues are very happy to speak with Listentotaxman visitors to discuss any tax questions they might have – just visit the Intouch Accounting website for contact details.

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 and advice on how to prepare for the change.

Why are the rules changing?

This change is about tightening up on non-compliance. HMRC believe that approximately one third of those working through their own company should be inside IR35, but 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 working outside of IR35 and will continue to do so. It’s estimated that at least 80% of IT contractors will remain outside of IR35.

What exactly is changing and how does it affect you?

IR35 rules themselves haven’t changed, but from April 2020, the responsibility for determining your IR35 status within the private sector will shift from you to your client.

Off-payroll working has been operating in the public sector since April 2017, and following an HMRC consultation on IR35 reform, Chancellor Phillip Hammond announced that he would extend off-payroll working rules from the public sector to large and medium-sized private sector organisations.

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.

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. Clients must ensure that they make decisions based on your individual circumstances and accurately assess your IR35 status. If you’re worried that your client will automatically lump you within IR35 to cover their backs, there are some steps you can take to give you both peace of mind the decision is fair and accurate -enlist the expertise of a specialist contractor accountant to do an IR35 assessment based on both your contract and your working practices.

While IR35 in general is a lot to get your head around, once the same rules apply across both the public and private sectors, this should begin to provide more clarity to companies on the type of contracts they need to fill. With previous experience after the public sector rule change, businesses should now be a little more clued-up on IR35 and be able to make clearer decisions on where contracts stand, and in turn, your decision to accept certain contracts will also become clearer.

How will the off-payroll rules be implemented in the private sector?

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

Do not let this deter you from going after private sector contracts.The government has made it clear that blanket decisions will not be permitted. Businesses need to consider each contract individually, using ‘reasonable care’ 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.

To help make things easier for both you and your client it is worth consulting with a specialist contractor accountant who can undertake IR35 assessments on each of your contracts to give you expert guidance throughout the process. Although the final decision will still be with your client, having your own evidence and accountant backing can help facilitate a constructive conversation for all parties.

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. If you are moved from outside to inside, this may be a good time to renegotiate your fee to help recoup any tax and NI losses.

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, and it gives you time to educate yourself on the legislation so you can ensure you’re doing everything right come April.

HMRC plans to publish online guidance and to 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 but in the meantime, you can find out everything you need to know by reading the contractor’s guide to IR35, or get in touch with an accountant with IR35 expertise for further advice

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 and if you know you genuinely are, there’s no reason for you to stop doing so After some initial hiccups when the rules were first applied to the public sector, today many contractors work outside of IR35 with no problem at all; even HMRC uses contractors outside of IR35 for its internal projects.

Remember, there’s also nothing wrong with operating inside IR35, if you choose 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 are 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. Some agencies may encourage you to trade as an umbrella company for some contracts, and if you choose to do so, it’s best to make sure you are working with a specialist contractor accountant who can help you make the switch in the most efficient way

If you’re unsure what’s best for you, check out this guide: Limited Company vs Umbrella 2019/2020 update.

Next steps

Whether you’re venturing into contracting for the first time or have been contracting for a while, 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 Intouch to help you understand the rules and determine the status of your contracts

IR35 may well be new territory for your clients, so by educating yourself on the IR35 legislation, you can make the process easier for everyone. 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.