Changes to IR35 are coming into effect from 6 April 2020. With just a few weeks left until the new rules are introduced, this is the time for businesses and contractors to start getting ready.
Below we explain everything you need to know including what the changes are, how they’re going to affect both businesses and contractors and how using an umbrella company can help simplify the process.
What are the changes to IR35?
From April, responsibility for determining the employment status of a worker will be taken from contractors and passed onto the client instead. Already applicable to public authorities, medium and large sized businesses within the private sector will now also be obliged to do this.
Failure to comply with IR35 can lead to fines and backdated demands for PAYE, tax and National Insurance contributions. It’s therefore important that both companies and contractors are fully aware of their upcoming obligations.
How IR35 affects businesses
If you’re a larger company that uses contractors or freelancers, you will need to identify the employment status of all your contractors and freelancers for tax purposes. If you consider a contractor to be inside IR35, it will be up to you to deduct their National Insurance Contributions (NICs) and income tax from their fee, as well as pay the additional cost of employers’ NICs.
If you’re a small business, you’re exempt from the changes so don’t have to worry about changing anything. You’re classified a small business if you meet two or more of the following criteria:
- Your annual turnover is no more than £10.2 million.
- Your balance sheet total is no more than £5.1 million.
- You have fewer than 50 employees.
What affects the employment status of a worker?
This is unfortunately a grey area. HMRC looks at a wide range of factors when deciding on someone’s employment status so we can’t tell you with absolute certainly who HMRC will deem to be an employee and who they would class as self-employed. Some key areas to look at however, include:
- Are your contractors free to work as they wish or do they have to work certain hours or from a particular location? Imposing rules and restrictions on workers means they’re more likely to be classed as an employee.
- Employees rarely risk financial loss by being employed whereas a freelancer or contractor will experience financial loss if a client fails to pay.
- Do contractors receive holiday, sick pay or pension contributions? Benefits should only apply to employees of the company, not contractors.
HMRC’s Check of Employment Status Tool (CEST) can help you to determine the employment status of your contractors. Please note however that this tool isn’t 100% effective so you should always double check with HMRC or PKB and we will be able to clarify this for you.
What if I deem a contractor to be an employee?
If a contractor falls within IR35, you will be responsible for deducting their income tax and NICs as well as paying employer NIC. Adding contractors and freelancers to PAYE can be a lot of extra work which is why many companies are now making the decision to insist contractors use an umbrella company, rather than adding them to their payroll.
A PAYE umbrella company is a standard UK limited company, operated by a third party supplier. They act as an ‘employer’ on behalf of its contractor employees and provide a payroll service, process all timesheets and invoices and pay employees a salary after allowing for deductions.
Naturally, this saves you a lot of time and hassle – even with the IR35 changes coming into place. If you’re thinking of using an umbrella company to help with IR35, please contact PKB. We can explain what this means in more detail and assist with getting you set up.
How IR35 affects contractors
If you work for a small or medium-sized business in the private sector or you secure jobs through a recruitment agency, you will need to check if the IR35 changes are applicable to you.
Contractors can also use the CEST tool to determine their employment status but again, please do get in touch with PKB if you’re unsure.
Contact your existing clients to find out if they’ve started preparing for IR35 and how this might affect you. Don’t forget, this even applies if you’re working for someone through a recruitment agency. The changes will only apply to contracts taken out after 6 April 2020.
If a client determines that you are an employee of theirs, it does mean that you will pay more tax and National Insurance. Sadly, there’s nothing you can do to avoid this but you can however appeal a client’s decision. To do this, you will need to write to your client and explain why you disagree with their determination. This needs to be done within 45 days of the decision being made and they are obliged to review their decision and get back to you.
If you’re a contractor or a business and would like more information about IR35, please don’t hesitate to get in touch. We can also explain everything there is to know about how umbrella companies work, how they can help simplify IR35 and how you can get started.
You can also find out more information from our blogs ‘IR35 reforms extended to the private sector’ and ‘Businesses have just six months left to prepare for IR35 changes.’
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