As most of you are aware there are some changes to the way the IR35 legislation is operated. To be clear there are no changes to the way IR35 works. IR 35 is the legislation which tries to differentiate between what is employment and what is an actual business activity. The law is changing as to who is responsible for deducting the tax associated and therefore who is responsible for paying tax due, fines and penalties if they get it wrong.
The change that is happening from April 2020 is that where you/your business is contracted by a medium or large business or agency, they will now be responsible for any tax that is due under this legislation. Where you are contracted to a small business it is your business that must make sure you are paying the correct tax. If you are in any doubt on your IR35 status and contracted by a small company (10M turnover or less) then please contact our office and we can review your contract and IR35 Status.
In this note, I am not going to address what is inside IR35 and what is outside IR35. This is because it’s extremely complex and different for each situation and quite frankly slightly intangible. This is and always has been the issue with this legislation. I am going to deal with the practical situation that is evolving out there in contractor land and your options going forward.
What I have seen so far is some of our contractors have received notes from the contracting companies that says 99% of contractors are inside IR35. I am not surprised at this stance as these companies are faced with a risk that if they deem someone outside IR35 and get it wrong then they could end up with a tax bill of roughly 20K per 100K spent on a contractor. The tax figure at risk is so large for the contracting companies when multiplied up and penalties added that the corporate risk managers will want all contractors inside IR35 for safety. Until the commercial operations are affected by contractor walkout over higher taxation and no employment rights, I don’t expect these companies to change their policy.
Some companies are saying they will use the HMRC tool once its finished to determine the contractor status. I expect this tool to deliver the same results as above there are two reasons for this:
- HMRC have lost a lot of high profile IR35 cases in the last 18 months. This shows that they can’t establish the correct status for contractors as its stands for this reason we can assume this tool will determine the contractor’s status incorrectly.
- HMRC have a vested interest in contractors being inside IR35. HMRC are not impartial and should not have been tasked with building this tool. I actually believe that an internet-based tool is impossible to deliver as several attempts have been conceived over the years and non-have lasted. HMRC have not even accepted the result of their tool in the past. Why will this time be any different?
You are faced with the situation that a majority of companies will insist all their positions are within IR35.
IR 35 Effect
It’s important to note you will be paying a higher tax rate on your income than an employee as you are not only responsible for the employee taxes but the employer’s national insurance that the employing company normally pays.
We have assumed a typical example below:
Two Shareholder Ltd company, a contractor on the rate of £50 per hour 37.5 hours per week for 44 weeks of the year (Turnover £82500) with £8000.00 of expenses.
In the above example, someone within IR35 would be £1352.00 per month worse off.
The fact to take away here is you will be worse off inside IR35 by around the above amount. In another recent example with a client, we calculated the additional tax at £16,000 per year.
Next steps to take:
As a contractor you need to ascertain your position first, C&C can’t help here unless we know what your company plans to do for definite. So please follow these steps and then you can choose what you wish to do from the options below.
- Speak with your contractor or agency and hassle them into what is their decision for IR35 ask for reasoning based on the specific terms in your contract. You might never receive the reasoning.
- Ascertain whether you can get access to a decision-maker and ask whether they will consider the treatment if we were to intervene on your behalf.
- If they will consider your status with professional input, please contact Phil at C&C and he will create a report for your contracting agency. Due to the time, this will take us we will have to charge an additional fee for this work.
- If the answer is no they won’t consider your position you will then be left with a decision to make please see below:
Inside IR35 what to do next
If you are deemed to be inside IR35 and there is no discussion to be had with your contracting company/agency, then you have the following options.
Stay and absorb the additional taxation
As above but you have two ways of doing this. You can shut down your Ltd company and move to an umbrella company or you can continue with your Ltd company. If the option is number 2 then your accountancy fees won’t change. From a tax position even though you are worse off Chippendale and Clark have more work to do. So, whether you use an umbrella company or your own Ltd depends if you are going to get a contract outside IR35 in the future and the cost of umbrella company services.
C&C will be happy to give you a cost for shutting down your Ltd company and finalising your affairs before the move to an umbrella. There is an option to extract all cash at a 10% tax rate.
Stay but increase your fees
As the title suggests raise your fee for the increase in taxation this may be a tactic to get the company back to the negotiating table. As soon as it costs them, they might want to investigate how they can change the contracting arrangement so they are happy you are outside IR35.
Vote with your feet
You can leave your contract at its end and look for a contract outside IR35. There are commercial reasons to do this. If a lot of contractors go down this route companies are going to have a skills shortage this happened in the public sector when these rules were introduced a few years back. Gradually you start seeing more positions advertised outside IR35 as entrepreneurial companies start to look for reasons to make the contracts fall outside IR35 and shore up their working practices to differentiate between employees and contractors. This allows these companies to attract the best contractors to gain a commercial advantage. In this case, Chippendale and Clark will continue as engaged until such time you either get a new role or not.
Take an employed position
There are other benefits to being a contractor other than higher earnings and reduced taxation but they were the main two. Now that most contractors are facing additional taxation through the current situation it might be worth considering an employed role. The main benefits for you are holiday pay, pension contributions and job security. In this case, Chippendale and Clark can give you a price for the shutting down of your company and for the final personal tax returns.
If you have any question please contact us today!
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