Important Changes in IR35 Guidance
Firstly, what is IR35? IR35 is designed to assess whether a contractor is a genuine contractor rather than a ‘disguised’ employee, for the purposes of paying tax.
The latest IR35 guidelines from HMRC state that from 6th April 2020 your clients (not yourself) will decide if you are applicable to the IR35 regime. If you provide work to a client through your own limited company (intermediary) then you should take note of the major changes in the IR35 regime and analyse if it will impact yourself.
As a contractor currently providing services to a client through an intermediary it is likely that you (the worker) are receiving payment in the following way:
1. Client: The business which receives work from yourself (the worker)
2. Client pays your intermediary (Ltd co.) the amount billed
for the work provided.
3. Intermediary: Your own limited company, that will bill the client
for the work you carry out.
4. You will receive dividend payment(s) from your intermediary which are subject to lower Income Tax rates and no National Insurance Contributions
5. Worker: You, the person doing the work
You may therefore be receiving the tax efficiency advantages or working through an intermediary. The HMRC IR35 regime is aimed at preventing some workers from being able to use this process, if the worker would be deemed an employee of the client if the intermediary was not to be used.
There is a lack of clarity and plenty of confusion on what it means for HMRC to view you as an employee of your client, however principal things to consider and ask when analysing your contract are:
HMRC deems that if your client has control over how, when, and where you complete your work, this implies employment:
- Does your client have control over the time, location, and days you are liable to work?
- Are you constantly supervised and directed by your client whilst completing the work?
HMRC deem that if you couldn’t easily substitute you for somebody else, this implies employment:
- Are you specifically needed by the client to complete the work, or could you bring in someone else to complete the contract?
Mutuality of obligation
HMRC deem that in practice self-employed contracts means completing work on a project-by-project basis. However, if this is not the case if would imply employment:
- Once you’ve completed a project for your client, is the client obliged to offer you more work, and are you obliged to take it?
- Are you able to work for other clients simultaneously?
These are some of the principal factors to consider, however there are a long list of potential factors HMRC consider. There is an HMRC tool to check employment status for tax (please see here), but even this has been known to give inaccurate answers.
What are the changes?
From the 6th April 2020 this decision will be taken out of your hands, as it will be the client’s decision whether you would be deemed an employee. If your client determines that you would be an employee, it will deduct tax and National Insurance contributions from all payments to your intermediary. The only exception will be if your client is deemed a small business, qualifying by meeting two of the following three conditions:
- Less than 51 employees
- Turnover of £10.2 million or less
- Less than £5.1 million on its balance sheet
If your client is deemed a small business your employment status will be continued to be decided by yourself.
Your client is not obliged to tell you of its decision until you receive your first payment with the deduction. You can contest your client’s decision, then your client will then have a time period of 45 days to explain, during which you can attempt to clarify with HMRC why their decision was wrong.
We would advise anyone who believes they may be affected to contact their clients well before the 6th April 2020 and request them to carry out the IR35 test on your current contract. The sooner you know their position on your employment status, the more time it will give you to contest their decision if they deem you an employee.