By PaperRocket Accounting, Aug 19 2019 12:55PM
On 11th July 2019, the government published draft legislation regarding off payroll working in the private sector- the full legislation can be found here, but the key points are largely in line with what was expected after the Budget, that from April 2020 in the private sector:
• It will become the responsibility of the client to determine the contractor’s IR35 status (currently it is the contractor’s decision).
• Small companies (size determined in line with the Companies Act 2006) will be exempt from these rules, meaning that it will still be the contractor’s decision if their client is a ‘small’ company.
• The client will be required to complete a status determination to assess IR35 status, ensuring there will be no blanket assessments (such as those we saw when this reform was first rolled out to the public sector). If the contractor disputes the IR35 status as determined by the client, they will have to appeal this with the client directly.
The government expect that this measure will “impact 170,000 individuals working through their own company, who would be employed if engaged directly”. However, they also say that “those who are complying with the existing rules should feel little impact. The measure is targeted at individuals who are not compliant with the current rules.”
So, it is worth making it clear- as long as your current contract is legitimately outside IR35, then there should be no reason why your client would not continue this classification, therefore meaning that there will be no change for you.
What if my contract is deemed to be inside IR35?
If you contract is deemed to be inside IR35, then the fee-payer will become responsible for deducting income tax and employees NI from your fee (the “direct deemed payment”). The fee-payer then has to pay their employment taxes on top- legally, these cannot be deducted from the contractors fees. Unlike with the old IR35 rules, there is no longer a 5% expenses allowance.
So, is it still worth having a limited company?
There is no ‘one size fits all’ answer to this question. Instead, you need to look at your own individual circumstances as, whilst it may initially seem like there’s no point having a limited company anymore, there can still be reasons to continue:
• Different contracts- if you work on more than one contract at a time, and more than 50% of those fall outside IR35, then it will most likely be worthwhile to stick with your limited company.
• Length of contract- if your inside IR35 contract is short term, and you are planning to look for new contracts that are likely to be deemed outside IR35, then it will be worth keeping your limited company open, as the short term taxes should outweigh the costs and time consuming nature of closing a limited company, only to reopen one for a new outside IR35 contract.
• Appeal- your contract may well be initially deemed to be inside IR35 by your client. However, as we mentioned above, there is the possibility to appeal. And it is worth bearing in mind that these rules will be in their infancy stage, meaning that just because initially the end client decides to adopt an inside status, doesn’t mean that decision is set in stone and, under different interpretation, and time, they may well change their mind.
• Some things never change- whilst it is true that if working inside IR35, the tax benefits of having a limited company that may previously have been enjoyed are lost, there are still some benefits to contracting that you can’t put a price on. The flexibility of working through your own limited company, as opposed to being an employee, is one of the main draws. Being able to work the hours that you want, in a location of your choosing, and the ability to arrange contracts around holidays or childcare is potentially priceless depending on your life circumstances. Some people also prefer the constant variety being a contractor can bring, with the ability to hop between contracts, not spending too long at one place doing the same thing.
So, when April 2020 rolls around, if your contract is deemed to be inside IR35, don’t be hasty. Take time to consider your options and make a choice that best fits you, your circumstances and future plans.
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