We ran through the basics of IR35 or ‘off-payroll working rules’ to give it its full title in our blog last year (need a refresh? Click here to read). The regulations came into force for public sector organisations in 2017 and are due to be rolled out to large private businesses in April 2020.
IR35 is not new news, it was introduced almost 20 years ago to tackle ‘disguised employment’ where some contractors take advantage of tax efficiency by working through a limited company when they are effectively working as an employee. The employer benefits by paying no National Insurance contributions and gives no employee benefits.
At the moment, contractors have the responsibility for assessing whether they fall within the IR35 rules but from April 2020 it will be the employer that must determine the status of their contractors.
With just three months until the reforms come in, some large organisations are taking steps to eliminate the risk of falling foul of IR35 by either insisting that contractors become employees or terminating the use of contractors altogether through a blanket assessment rather than assessing each contract on its merits. This has been seen most clearly in the banking and pharmaceutical sectors and is not good news for personal services companies where the contractor is the sole director of their limited company.
So what can contractors do to mitigate the damage that could be heading their way? Well, one thing to do is to identify and review current contractual arrangements. As explained in our previous blog, the main tests of employment that will be applied are control, substitution and mutuality of obligation.
There are other criteria that could impact your IR35 status such as:
- Equipment– is it provided by you or your client?
- Financial risk– are you responsible for any errors made and rectifying them in your own time?
- Payment terms– are you paid on a retainer or on a project basis at milestones or on completion?
- Integral to the organisation– are you ingrained in your client’s structure with people reporting to you?
- Exclusivity– do you work for other clients too?
- Contracted relationship– is this a genuine supplier/customer relationship?
- Your business – do you have a business website, an office space or employees?
Another element to understand is whether your client is a small or large company. If your client is deemed to be ‘small’, contractors are still allowed to determine their IR35 status. A small business is defined using the Companies Act definition as having:
- an annual turnover of less than £10.2 million
- a balance sheet of less than £5.1 million
- 50 employees or fewer
Off-payroll working rules offers another significant challenge to the self-employed and if you’re finding IR35 way too taxing, contact the experts at CRM for help on 01865 379272.