IR35 in the Private Sector: What you need to know

IR35 in the Private Sector - Webinar Summary

Back in September, Kingsbridge Contractor Insurance’s Legal Manager, Nicola Hayman, teamed up with Andy Chamberlain, Deputy Director of Policy at ISPE, to deliver a special webinar for contractors who may find themselves caught up in next year’s private sector IR35 reforms. The webinar attracted a huge 970 contractors, all keen to find out more about whether IR35 will affect them and how it will be different to the already-rolled-out public sector reforms.

If you have an hour and a cuppa, you can sit down and watch the webinar on YouTube. But if you’d prefer to read about it, then don’t worry. We’ve summarised the important points of the webinar into this article so you can get through it a bit more quickly.

You can still grab that cuppa first though….

 

IR35 and its public sector roll-out

According to Chamberlain, IR35 is a “deadly cocktail of complexity, tedium and importance.” Complicated because, as has been aptly demonstrated, it’s hard to know when it applies, boring because it relates to tax (not many people find tax very interesting), and important because the government are prioritising IR35 tax compliance. Which, ultimately, means contractors need to get around the complexity and overcome any sense of boredom because, well, it’s happening.

So how is your IR35 status determined? In the first instance, there are three key factors to consider to determine status:

  • Personal service – Can you send a substitute to do the work in your place without requiring permission from your client? If you have an unfettered right to do this then you can argue that IR35 doesn’t apply to you.
  • Mutuality of Obligation (MOO) – This is a highly contested feature as people define it differently and, Chamberlain says, the government have applied an extreme definition to their reforms. Ultimately, there must be obligations on both parties (contractor and client) to do something for one another for IR35 to apply.
  • Control – Who controls the work that’s being done? Contractors shouldn’t be controlled by their client in the way an employee is controlled by their employer.

In order to make a case that IR35 does not apply to you, you’ll need to be able to demonstrate that at least one of these factors does not apply to your contract and working practices However, other factors can be taken into account as well. This is known as the business-on-own-account test which was brought to the fore earlier this year when HMRC lost its IR35 case against presenter an journalist Kaye Adams. This test looks at whether you are in business on your own account or whether you are “part and parcel” of the organisation by examining things such as:

  • Do you take on financial risk?
  • Do you need your own business insurance?
  • Do you need to provide your own equipment?
  • Do you attend training, team meetings, or team building sessions?
  • Do you have access to the staff car park?
  • Do you have access to the staff canteen?
  • Do you attend office Christmas parties?

The argument from HMRC is that if your answers to these questions suggest you are actually “part and parcel” of the organisation, then you are a disguised employee and, therefore, IR35 applies. HMRC claim that there is widespread non-compliance on this, but Chamberlain points out they have lost six out of seven of their last IR35 cases since the roll-out in the public sector, so perhaps non-compliance isn’t quite as widespread as they believe.

So, what changes do the IR35 reforms mean? Put very simply the changes mean that a contractor’s IR35 status will now be determined by the end engager, not the contractor as it currently is. If a contractor is found to be within IR35, they will be taxed at source in the same way as a permanent employee. However, unlike a permanent employee, they will not have any employment rights and will still need to charge and pay VAT.

Predictably, this has created issues in the public sector:

  • Public sector bodies are notoriously risk averse and so blanket decisions were made, bringing contractors inside IR35 when there was no reason for them to be. TfL and the NHS both did this initially, revising their approach later after the damage had been done.
  • As a result, many contractors left or are preparing to leave the public sector (31% according to an IPSE and CIPD joint survey in January 2018).
  • Because of this, rates are rising meaning the public sector now has to pay more to get work done.
  • Many people are paying employment taxes while being denied employment rights.

Now, we’re sure you can see where the “complex and boring” bit comes from. But forewarned is forearmed and, at Kingsbridge, we think it’s important to understand the detail of what’s happened already in order to understand what will be happening in the private sector next year.

 

IR35’s private sector roll-out

As most of you will know, IR35 will be rolling out in April 2020, as announced by then-Chancellor Philip Hammond in the 2018 Budget (and as predicted by IPSE and most other industry bodies when the public sector reforms were announced).

The first thing to note is it will only affect contractors working for medium and large private sector end clients (note – this is not the size of the recruiters). HMRC categorises these, at present, as any company with an annual turnover of more than £10.2 million, or a balance sheet of more than £5.1 million, or more than 50 employees. So, anything above any one of these criteria means a business falls into the medium or large category and so is liable for IR35.

If this applies to you, the major change is that your PSC no longer determines your IR35 status and is no longer liable for ensuring the correct tax is paid.

  • Your end client now determines your IR35 status
  • Your fee-payer is liable for ensuring correct tax is paid
  • Tax will be paid at source (PAYE), usually at the basic rate dependent on earnings
  • The end client and fee-payer may be one and the same if your client pays you directly, or they may be two different entities if you are paid via an agency

Your end client will provide a Status Determination Statement (SDS) outlining your IR35 status and their reasoning. This will be passed down the chain (where necessary) from the end client to the fee-payer. Liability transfers with the SDS, so if a party in the chain fails to pass the SDS on, then they become liable for non-compliance. The SDS is based on the engagement, not on you as an individual. So, you could be caught inside IR35 on one contract but not on another. In fact, you could be working on two contracts at the same time, one within IR35 and one outside of it.

A big difference to the public sector reforms is that there will be a client-led status disagreement process so there is an agreed process for you to challenge the SDS if you don’t believe it’s correct. Your end client has 45 days to respond from when you push back, although they are not under any obligation to change their decision. It at least means that there is some way to formally disagree with decisions though – something that was missing from the public sector reforms.

 

What can contractors do to prepare for IR35 reforms?

Hayman is very clear that if your assignment is legitimately outside IR35 then you should be able to continue working in this way. Equally, you should ensure you review your working arrangements prior to next April to avoid being caught by IR35 unnecessarily.
She suggests you can prepare for this by:

  • Discussing your role with clients and recruiters
  • Ensuring you understand the new process
  • Understanding what defines your status (look back at the points made earlier or take a look at the Government’s CEST tool)
  • Checking your business insurances – you will still need this as long as you are contracting through a limited company
  • Checking your working practices against your contract (You can get a review from our specialist IR35 review partner Larsen Howie)
  • Renegotiating your contract in time for the reforms – especially if you have been working outside IR35 on 5 April, but will find yourself within it on 6 April on the same engagement
  • Considering other models of working (where necessary)
  • Being aware of unscrupulous umbrella companies (for instance those who claim to offer big take-home numbers)
  • Doing your research -In August this year, the Government published guidance for clients and agencies which can be found on the UK website. Draft legislation has also been published
  • Speaking to experts

At Kingsbridge, we’ve already been writing lots to help contractors understand the IR35 reforms and aim to have more expert guidance available over the next few months so keep up to date with our blog for all the latest.

 

 

Beat the Insurance Premium Tax Increase!

IPT Increase

Regular readers of the Kingsbridge blog will already be aware that Insurance Premium Tax is rising to 12% from 1st June 2017.  You can read our take on the increase here.

So what does it mean for you? If you’ve been putting off a necessary insurance purchase we’d recommend that you take advantage of the window between now and the end of May.

It’s worth noting that the saving only applies if your policy starts before 1st June. If you were to buy before that date but chose to have the cover start after then you would fall into the 12% bracket.

Getting your cover in place might not be the most exciting of prospects, but it makes sense to save as much money as you can.

If you’re a contractor or freelancer why not get in touch with Kingsbridge? We offer the simplest, most compliant, and most comprehensive self-employed insurance cover in the market. The best possible cover at an unbeatable price. What’s not to like? You can reach one of our friendly Customer Service Team on 01242 808740, or you can head on over to our website and get a quote by clicking the button below.

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Tax Changes for Contractors

Contractor Tax Changes

With all the political machinations currently taking place, it’s easy to forget that the new tax year begins today. As of midnight on 6th April a number of new policies took effect, including several that’ll have an impact on contractors and independent professionals. Although the most recent Budget still looms rather large in the proverbial rear-view mirror, these changes relate to the Budget that took place in July last year.

First and foremost, the tax rules surrounding dividends are now changing. The first £5,000 of dividend income earned by shareholders will be completely free of tax, with any amounts over that initial marker being taxed at 7.5% (for any income falling within the basic rate band). Beyond that, higher rate and additional rate earnings will also be subject to higher tax levels of 32.5% and 38.1% respectively. Although this will likely affect the take-home pay of many contractors, it could be by as little as 2% to 4% (see this article on ContractorUK for a more detailed breakdown).

Read more

Budget 2016 Analysis: ‘A Budget That Backs Small Business’

Budget 2016

George Osborne’s latest Budget as Chancellor passed today as expected, with no real surprises. There was good news for the self-employed, but the spectre of a clampdown on the use of Personal Service Companies (PSCs) by public sector employees still looms like a heavy cloud.

As we’ve mentioned on these pages before, Osborne’s tightening of the vice on the so-called ‘Paxman tax’ comes predominantly as a result of public outcry at perceived tax evasion by celebrities and sports stars. However, such measures will also impact those contractors working in the public sector, meaning that from April 2017 they will now face investigation from their clients and agencies to confirm whether they are ‘true contractors’ or simply a ‘disguised employee’. If the client or agency believes that the contractor in question is a disguised employee, it will be required to deduct tax at source from all payments made.

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The Self-Assessment Deadline – Tips For Contractors

Self-Assessment Deadline

The beginning of the year can be a stressful time for everyone, with new resolutions to keep to, the return to work after Christmas excess, and the cold days of winter. For contractors, there’s also the added burden of the self-assessment deadline looming large at the end of January (the 31st to be exact). We can’t ever promise to make doing your tax returns any more fun (although we find a glass or two of wine tends to help), but we can give you some tips to help the process go more smoothly for this year and the years beyond. We know your time is at a premium so we’ll get on with our guide without any further fuss:

Make sure you submit your tax return on time

It might sound like a given, but you’d be surprised at the number of horror stories we’ve heard about contractors leaving things too late and not making the deadline (which, to remind you again, is 11:59pm on 31st January). If your tax return arrives after this point you’ll pick up a £100 fine. So check those internet connections, make sure you know where all your paperwork is, and give yourself more time than you think you’ll need.

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Tax and the Modern Contractor

Contractor Tax

We’re taking another dip into the Kingsbridge archives this week as we continue to highlight some of our previous posts you may have missed. Today, we’re taking another look at tax and what the modern contractor needs to consider.

You’ve established yourself as a contractor; you’ve networked, you’re looked for jobs, and you’ve completed your first contract with a new client. Now it’s time for the best bit – receiving your first cheque.

Don’t get too attached to that number, though. You need to make sure you factor in the tax you owe, now that your tax isn’t being collected on a pay-as-you-earn basis. When you’re starting out as a contractor, it’s really important that you get your head around the realities of your tax situation in order to ensure that you don’t incur the penalties associated with paying the wrong amount of tax.

Read on to find out the kind of things that are worth considering when it comes to tax and the modern contractor.

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Our Budget reaction: What impact will it have on the contractor community?

Summer Budget Reaction

The first Conservative-only Budget in 19 years took place in the House of Commons yesterday and whilst there were some positives, the Tories announced a number of changes which will undoubtedly affect contractors in a negative way, with contractor dividends, expenses, and IR35 among the areas targeted by the Chancellor.

Chris Bryce, CEO of IPSE, noted: “The combination of the action on dividends, clamping down on travel and subsistence and potentially toughening up IR35 legislation could leave many contractors feeling pretty sore.”

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A look ahead – what will the general election mean for freelancers and contractors?

General Election 2015

It pays for freelancers, contractors and the self-employed to pay attention to what is happening politically in the country.  Regardless of the outcome of any election, the independent professional community will be affected by policy making and the winning party’s stance on the self-employed and small businesses in general.

In research published last year, IPSE found that up to 90% of their freelance membership was likely to vote in the upcoming general election. Now, with just over a week to go until the day of reckoning, interest within the freelance community is at its highest.

With election fever well and truly in full swing we wanted to take a brief look at how each of the main parties proposes to support the UK’s freelance community and how independent professionals will fare depending on which party, or which coalition, assumes power on 7th May.

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Five resolutions every contractor should make for the new financial year

New Financial Year 2015

We all made our diet, fitness, productivity and anything-else-you-can-think-of resolutions in January, as the new calendar year rolled in. However, April brings us a new kind of New Year: the new financial year.

As we covered last month, the Chancellor has revealed his final Budget before the general election and the calendar has officially restarted on the fiscal year. So, what better time to look at some practices every contractor can assume for the benefit of their finances. Here are our five financial resolutions that every freelancer should think about implementing this financial year.

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Budget 2015 – Kingsbridge round-up

Budget 2015 Reaction

In his speech, George Osborne today promised that today’s final, pre-election Budget will “back the self-employed, the small business-owner and the homebuyer” proclaiming that Britain’s economy is once more on the rise, dubbing the nation, ‘The Comeback Country’.

Freelancers face a mix of measures following Osborne’s 59 minute speech yesterday, many of which appear to be aimed at making the life of the independent professional much easier, while some still target cracking down further on tax avoidance.

Despite Osborne’s insistence that Britain is in the midst of an economic comeback, much of the rhetoric used throughout the speech focused on further reducing the deficit and national debt, with Osborne even expressing at one point, “we choose… to use whatever additional resources we have to get the deficit and the debt falling.”

With that said, let’s take a look at some of the main measures from 2015’s Budget that are likely to affect freelancers, contractors and independent professionals over the course of the next year.

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