IR35 and changes to public sector contractors
We are writing to you to notify you of the recent changes with regards to IR35 and the new rules being introduced in April 2021. IR35 is tax legislation to prevent ‘disguised employees’. This was previously announced for April 2020 and the introduction was subsequently deferred until April 2021.
A practice update (a copy is enclosed) was posted on our website in October 19 outlining the changes when these were first announced which explains more.
IR35 is a tax rule which may apply to contractors who provide their services to their end user via a Limited company. It will also apply if your company uses Limited company contractors. It has been in place since early 2000 and there has been much debate about its effectiveness and fairness. The changes were first introduced to the public sector in April 2017 and are now been planned as being extended to the private sector.
From April 2021 large and medium sized organisations will be responsible for determining if their contractors are in fact employees for tax purposes or are truly contractors. HMRC’s aim here is to treat contractors as employees for tax so that they can therefore receive more income tax and national insurance contributions. Contractors who work via a limited company will usually draw a tax efficient salary (and therefore not pay national insurance but pay a salary deemed to be high enough to preserve contributions for a state pension) as well as dividends which are taxed at 7.5% up to the higher rate threshold.
A large or medium sized end user organisation is defined as having 2 of the 3 from the following criteria;
Turnover greater than £10.2m
Balance sheet £5.1m
More than 50 employees.
If you work for a large or medium sized organisation then it will be up to them to determine your employment status and they may have already spoken to you about this.
If you work for a small organisation then the emphasis is still on you to determine your status.
If you work via an agency then it is up to the agency to determine your status.
If the contract is deemed to be ‘inside’ IR35 then the large or medium sized organisation will be responsible for treating the contractor as an employee for tax and national insurance purposes and will deduct full tax and national insurance from you, you will then receive the net amount. We will still need to also submit these figures under your own company payroll scheme, this is not taxed a second time through. Within your own accounts it is then possible to deduct 5% as ‘general’ expenses.
If you are working for a small organisation and your contract falls ‘inside’ IR35 then it will be up to you to determine your status and to notify us, if we process your payroll to apply the full tax and national insurance mentioned above.
There are many factors which determine if a contractor is ‘inside’ IR35 but the main ones are as follows;
Personal service and substitution – Does the service have to be provided by an individual or by the company, i.e. could you use a substitute in your company to provide the service? Could you hire somebody to effectively subcontract the work to? If you can provide a substitute then this places more emphasis on you being ‘outside’ of IR35
Mutuality of obligation (MOO) – Does the end user have to provide work and do you have to accept it? Is there a notice period and if so this suggests there is MOO. Are you able to work for other companies at the same time? Can either party cancel the contract at any point and with immediate effect?
Supervision, direction and control – If the task is set by the organisation but it is up to you how you deliver it then this puts more emphasis on you being ‘outside’ of IR35, i.e. they tell you what they want but not how to do it.
If you can prove that the above factors don’t exist (and these should be specifically included as clauses in your contract) then you should be ‘outside’ of IR35.
Other factors which also are used to determine your status are;
Do you provide your own equipment? If yes then this puts more emphasis on you being ‘inside’ of IR35.
Is there a financial risk to you, do you have to rectify any errors in your own time and at your expense? If yes then this puts more emphasis on you being ‘outside’ of IR35.
Do you attend team meetings and have access to the staff car park, canteen and gym? If no then this puts more emphasis on you being ‘outside’ of IR35.
Do you have your own insurance, are you actively advertising and looking for other contracts? If yes then this puts more emphasis on you being ‘outside’ of IR35.
Do you charge your client per hour or on completion of the agreed task? By hour would be a factor for being “inside” IR35.
HMRC have recently updated a tool on their website which can be used to determine the contract status, this is known as the CEST tool and can be accessed via the following website address;
We are therefore urging all contractors to thoroughly check their contracts (present and any future ones) and input the details into this tool. It is an anonymous tool but the results can be used to challenge any future HMRC enquiry into IR35. The tool will therefore determine your status and a copy should be kept and also sent to your accountant here at Heslops.
We strongly urge you to review and update any existing contracts in place to include specific clauses as mentioned above. In the event of a HMRC IR35 investigation they will require copies of contractors to establish the facts.
The tool can also be used to determine the status of any subcontractors which you may yourself use.
If you are ‘outside’ of IR35 then it is fine to carry on as usual, if however the tool determines that you are ‘inside’ IR35 then please let your accountant know and we can discuss this further.