What contractors should do with the IR35 reprieve

IR35 delay

To say it’s been an eventful few weeks would be an understatement and we know that our customers have a lot of things on their mind right now and that IR35 is probably the least of them. We understand that many contractors are happy that it’s been delayed until next April although frustrated at the distress it’s caused to date. Beyond that you’re more concerned with keeping yourself and your family healthy through the COVID-19 pandemic, and ensuring your business weathers this storm.

That being said, your IR35 status is something to keep eye on and make sure that, as a contractor, you take care of your responsibilities now and prepare for the changes now due in April 2021.

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Government announce IR35 reforms delayed until April 2021

Houses of parliament
In an unexpected move yesterday evening, the Government called a temporary halt to the introduction of IR35 reforms. Originally due to come into effect on 6th April, they have now been delayed by a year until April 2021 as the fallout from the spread of Covid-19 continues to become clear.

“This is a deferral in response to the ongoing spread of Covid-19 to help businesses and individuals,” declared Steve Barclay MP, Chief Secretary to the Treasury in the House of Commons yesterday.

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Spring Budget 2020: what it means for contractors

Spring Budget Image Final

Contractors, recruiters, accountants, end clients and everyone else in the sector have been waiting with eager interest for the Spring Budget 2020 for a number of reasons. It’s the first Budget of the current Government, it’s the first post-Brexit Budget, it’s the first Budget for new Chancellor Rishi Sunak, and the last Budget before the ushering in of the IR35 private sector reforms on 6th April.

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Can IR35 be backdated?

calculator blog

With the IR35 reforms now just over a month away, it really is time to get your house in order by checking your contracts and working practices to ensure you’re safely and legitimately outside IR35. If not, we recommend you have necessary conversations with end clients and recruiters to make sure everything is ship-shape for 6th April.

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An IR35 glossary to break through the IR35 jargon

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With just over a month to go until the new IR35 legislation kicks in on 6th April 2020, our key words are preparation, preparation and preparation.

A big part of being prepared for IR35 is understanding IR35. This may sound obvious, but the fact is there is so much jargon involved in the legislation that simply understanding what it all means can be a minefield in itself – especially for those newer to contracting. We’ve put together this glossary of the most-used key terms around IR35 so that you have a go-to guide should you find yourself wondering, “Mutuality of Obligation? What on Earth does that mean?”

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Should you work under a Statement of Work?

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It’s likely that, as a contractor, you’ve not heard of a Statement of Work (SoW) before and there’s not really a reason why you should have. Until recently, they weren’t particularly commonplace but as we hurtle towards the implementation of IR35 reforms in the private sector, they’re very much on the rise.

There is one very good reason for this; SoW agreements – formal arrangements put in place to guarantee work carried out by a contractor for a client is delivered in line with particular standards and expectations – heavily suggest an outside IR35 status, and can even act to move any potential IR35 responsibility and liability down the supply chain away from the end client.

So, now we’ve piqued your interest, sit back while we explain all about Statements of Work and why you might use them.

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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).

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