What does IR35 reform mean for contractors?

10 mins

Reducing income by up to 25% and costing limited companies thousands in additional taxes, th...

Reducing income by up to 25% and costing limited companies thousands in additional taxes, the planned reforms to IR35 have the potential to deliver six-figure bills to contractors. Originally introduced in 1999, the legislation has been trying to cut down on ‘disguised employees’ – a term used by HMRC to describe workers using intermediaries such as limited companies to pay less tax.

The reformed version has been applied to the public sector since April 2017, while the private sector’s implementation was pushed back until 2020. However, that date is now less than a year away and contractors need to know what it means for them, to ensure they don’t end up paying extra tax.

To remain compliant, businesses need to start evaluating their contracts with limited companies to ensure they’re genuine partnerships. HSBC has already decided they won’t be assessing limited company contractors. Instead, they’ll be providing an additional contract extension before delivering an ultimatum, quit or become employees. Replacing these contractors with employees will remove any IR35 worries for the bank, but it does raise questions regarding whether they’ll be able to retain experienced contractors.

How is IR35 determined?

Typically, an HMRC inspector or tribunal judge will evaluate the working relationship between the employer and contractor. It’s then decided if it is truly a business-to-business service or more akin to an employment contract.

Typically, this status is determined through 3 different factors:

  • Control – How much control does the client have over how, when and where the worker completes the job?
  • Substitution – Can the contractor send someone in their stead or does the job require their personal service?
  • Mutuality of obligation – Are the employer and contractor obligated to offer and accept work.

If it is deemed to be a business-to-business service, then IR35 does not apply. However, if it is found that the contractor should be directly employed by the client, then both parties will have to pay the missing income tax and National Insurance Contributions.

Furthermore, HMRC can evaluate past contracts to see if the legislation is applicable. As a result, they can demand tax for previous years including interest and any penalties, which can quickly see the total reach six-figure sums.

What happens if it applies to you?

Any contracts found to fall within IR35’s criteria will see the contractor be taxed as if they had been an employee the whole time. The entire deemed salary will be subject to Income Tax and NICs and affect annual net take-home pay.

For example, if your daily rate sits at £400, then being clear from IR35 would see you bring home £59,237 after tax. However, if you’re found owing by the legislation, then that figure would drop to £52,484, increasing the tax paid by £6,753.

While reforms are on their way, the legislation has been in force since 1999. However, it has been heavily criticised as being poorly conceived, badly implemented and unnecessarily harsh on genuine small businesses. Fortunately, legitimate contractors shouldn’t have a problem if they’re investigated by HMRC providing they follow best practice.

At Senitor, we provide recruitment solutions for those working on a contract basis. So, if the IR35 reforms have you looking for new opportunities, then get in touch today and we can help find your next role.

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