What contractors need to know as off-pay tax rules to change
THE off-pay roll tax rules, known as IR35, are changing on April 6, 2020. Working as a contractor rather than an employee is often viewed as advantageous to both companies and individuals.
The companies don’t pay employer’s national insurance (13.8%) and don’t offer employee benefits such as sick pay, holiday pay and pension.
The individuals pay lower employee’s national insurance and account for their own tax.
However, in order to be able to work in this way the arrangement has to be one of genuine selfemployment, not employment dressed up to look like self-employment simply by inserting a limited company (a personal service company, PSC) between the individual and the engaging company.
The individual would be classed as an employee if it were not for the fact that they are providing their services through a PSC, the IR35 rules, introduced in 2000, kick in so that those individuals are made to pay broadly the same income tax and national insurance contributions as other employees.
The change that is coming next April shifts responsibility for operating the off-payroll working rules (IR35) from the individual’s PSC to the organisation or business that the individual is supplying their services to.
This includes responsibility for deciding whether the rules should apply and deducting the associated employment taxes and national insurance contributions.
This has already been the rule for the public sector since 2017 and it brought in an additional £550 million
in tax revenues in its first year.
Following a consultation process, the government is from April 6, 2020, extending the same rule to the private and third sector, although small organisations are not subject to the change.
The change is expected to impact on 170,000 individuals working through their own companies who would be employees if engaged directly.
Companies and individuals alike are being urged to start preparing for the change now.
Companies should identify how many PSCs they engage with and do a risk assessment to establish their exposure to IR35.
There will also be higher costs for the engaging companies and less money at the end of the month in the pockets of individuals.
I act for a number of clients who have what’s called portfolio careers.
This means they don’t have a 9-to5 job but provide consultancy services, typically through a limited liability partnership (LLP), to a portfolio of different companies.
The press coverage of the change to the IR35 rules means that a number of these portfolio clients have contacted me in recent months, wanting to understand if the changes impact on them.
No, is what I am telling them, for the simple reason that they are all genuinely self-employed.
The contracts I have drafted for them reflect their self-employment status: they have a great deal of freedom as to how, when and where they provide their services, passing what is known as the golf club test, that is, if it is a sunny day they can go off and play golf and do their work another day, without having to ask permission.
They are at risk if their work is not to standard and often have their own professional indemnity insurance. They provide their own equipment.
The change in the IR35 rules doesn’t affect them for the simple reason that IR35 does not apply to the self-employed.
However, there is a complication for portfolio clients who in addition to providing consultancy services to a company, often also act as a nonexecutive director for it.
Any remuneration payable to these directors, even though they are not employees, must be paid through pay roll and subjected to PAYE tax and national insurance.
They are not employees, don’t get employee benefits like holidays and sickness pay, but because they are office-holders of the company, they must, under HMRC rules, be taxed in the same way as employees.
Both companies and directors routinely get this wrong, sometimes intentionally to try to avoid NI, but often because they have just not appreciated how directors must be taxed, and end up with tax bills, interest and penalties.
However, this is not because of the IR35 rules.