Contractors must prepare for new off-payroll tax changes

IR35 legislation is to be extended to the private sector in April. Here Dave Chaplin from ContractorCalculator outlines what contractors in the sector should do before April to avoid long-term costs.

employee using calculator


New tax legislation that will be introduced in April 2020 is set to have a huge impact on contractors working in the private sector as the Government takes steps to raise more taxes from so called ‘deemed employment’.

The new legislation will force private sector companies to be responsible for determining a freelancer or contractor’s employment status for tax purposes, or “IR35 status”, and then tax the contractor’s rate as employment income if applicable. This is already in place in the public sector and has led to a big reduction in the hiring of limited company contractors.

And just like hiring firms and recruitment agencies, private sector contractors have considerable issues to address in preparation for the off-payroll rules. Doing nothing could prove very costly. Dave Chaplin is CEO and founder of ContractorCalculator and IR35 Shield. Here he outlines what contractors should do before
April 2020, and why.

What your client needs to know about the off-payroll rules

If clients ignore or delay dealing with the legislation, they will place substantial risk on their projects. Amongst public sector clients, the tax liability risk threatened by the off-payroll rules has proven an effective deterrent from hiring contractors outside of IR35. This is also already becoming a recognised practice in the private sector, where several firms have issued blanket bans on limited company contractors altogether.

Your first job is to explain the impact of such actions to your client and warn them of the consequences. These include:

  • IR35 status disputes resulting in contractor walkouts
  • Contractor abandonment of projects, resulting in delays and cancellations
  • Greater cost of retaining contractors ‘inside IR35’ due to increased rate demands
  • Employment rights challenges from workers deemed ‘employed for tax purposes’

Though many clients won’t see it at first, the accumulative cost of refusing to engage contractors outside of IR35, or via their limited companies, is potentially very damaging.

Meanwhile, the potential impact of the tax liability that many clients are seeking to avoid can be effectively mitigated, providing they adopt the correct compliance solution.

The importance of acting early

Having talked to your client, you should have established their approach to the off-payroll rules and whether they intend to carry out full and proper IR35 assessments, or if they plan to move all their contractors into payroll arrangements.

Act early and don’t rely on potentially empty promises of forthcoming IR35 assessments.

You don’t want April 2020 to be fast approaching when your client demands that all contingent workers be put onto an agency payroll, as adopted by several major organisations.

If your client doesn’t appear to be taking their compliance requirements seriously, you might want to explore opportunities elsewhere.

Securing an outside IR35 contract and continued compliance

Opportunities outside of IR35 will be available, and some positions will even be advertised as such. But these positions won’t be vacant for long, which is why it pays to find an ‘outside IR35’ contract as early as possible.

Once you have secured work on an ‘outside IR35’ basis, the key is to sustain your IR35 status and engage in working practices which continue to reaffirm this. Brush up on your understanding of IR35 and the key employment status factors.

Control, personal service, and mutuality of obligation (MOO) are the three fundamental factors which generally determine IR35 status, and contractors should have a solid grasp of them.

Remember that there will now be two versions of IR35 in play – the original intermediaries legislation (Chapter 8 of ITEPA 2003), which will still be applicable where the client meets the small company’s exemption, and the new off-payroll legislation (Chapter 10 of ITEPA 2003). Whilst both are based on the concept of ‘deemed employment’, the tax treatment is different, and you’ll need to understand why.

Calculating rate renegotiations for ‘inside IR35’ contracts

If you’re considering an ‘inside IR35’ engagement under the new legislation, you need to understand the financial impact that the Off-Payroll rules have on your income. Working ‘inside IR35’ under the new regime not only imposes an employment tax liability on your client and/or agency, it also subjects you to a tax hike, so knowing how much you would need to increase your rate by for an ‘inside IR35’ engagement to be net income-neutral is important.

If the ‘inside IR35’ status determination has come about as a result of a risk-averse client refusing to conduct a considered assessment, you are fully justified in attempting to renegotiate your rate to counter your tax hit.

Calculating the increased rate can prove complicated. Every contractor’s circumstances differ, and there are various factors to consider, including the withdrawal of tax relief on expenses previously claimable. Our calculations show that, for a contractor entering an ‘inside IR35’ contract to maintain the same level of take-home pay as before, the cost of hiring for the client could increase by as much as 43%.

ContractorCalculator’s Off-Payroll (IR35) calculator provides a detailed breakdown on the impact of the off-payroll rules on your earnings, including how much you would need to increase your rate by, having factored in your current rate and annual expenses.

‘Inside IR35’ contracts and the threat of historical tax risk

If you are offered an ‘inside IR35’ contract by an existing client, having previously operated outside of IR35, beware that you could be exposing yourself to historical tax risk.

Though HMRC has stated that the off-payroll rules will not trigger a retrospective investigation, experts have advised that taxpayers treat these comments with caution, warning that the taxman could use the overturning of a contractor’s IR35 status as an excuse to open an enquiry into their tax affairs. You might be wise to look for opportunities elsewhere.

Beware of non-compliant ‘umbrella companies’

Contractors are also advised to avoid loan-based umbrella tax avoidance schemes. Despite setting out to tackle tax avoidance, the off-payroll rules have resulted in heightened adoption of non-compliant schemes and many contractors have unwittingly entered into these arrangements. Be wary of the indicators of a non-compliant scheme, such as dubious or unclear payment terms, or a lack of professional accreditation.

April 2020 is only a matter of weeks away so my advice to contractors is act now to plan for your contracting futures.

*Dave Chaplin is CEO and founder of contracting authority ContractorCalculator and IR35 Shield. The site provides free online expert advice and information to contractors and freelancers.

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