The original legislation was created to ensure that contractors operating as ‘disguised employees’, were paying the correct amount of tax and NI by taxing them in a similar fashion to those who are employed.
From 6th April 2021, Limited Company or Personal Service Companies (PSC) contractors working in the private sector will no longer be in control of assessing their own IR35 status.
IR35 affects all contractors who are operating through a Limited Company or personal service company (PSC) and this arrangement means that they can benefit from company related tax and NI savings. As it became a popular route for contractors over the years, it also created a problem for HMRC because the decision of how the rules were applied, rested solely on the contractor e.g. if they were a genuine contractor (outside IR35) or an employee (inside). Unsurprisingly, most contractors put themselves outside of IR35 and enjoyed greater tax benefits, something that HMRC disagreed with in many instances, but found hard to enforce against by having to target individual PSC’s every time they brought a case. The knock-on effect was that HMRC were not winning enough of the IR35 employment related cases which is why they have targeted the ‘upper chain’ in a move designed to have greater success and ‘self-policing’ of their policies.
The ‘off-payroll’ reforms take the responsibility away from you to decide if you are ‘inside’ or ‘outside’ IR35 on each assignment. This might sound like a big relief that you don’t have the worry or hassle of getting this wrong in future, but it’s not that simple, because the decision now rests in the hands of the end client in conjunction with the fee-payer e.g. a recruitment agency. This creates a certain panic amongst those parties making the right call because the consequences risk being liable for a tax bill. Therefore, we may start to see ‘blanket’ decisions aimed at minimising the risk, which will affect those that still have a strong case of being engaged as a Limited contractor. Likewise, it will also see those contractors who have been wrongly categorised as PSC’s in the past to consider other options, especially those in the lower pay-scale bracket.
Here are some of things to look out for if you continue to contract through your Limited Company:
As expected, the reforms will only apply to medium and large companies. Any contractors that are engaged by a small company will work the ‘old way’ and have responsibility for determining their own IR35 status.
The current rules within the private sector allow a deduction of 5% prior to calculating your PAYE Tax and NI liability which is intended to compensate the PSC for the costs of administering things like the IR35 legislation. The PSC will no longer bear the responsibility for the determination of the IR35 status of the contract or making the payroll submissions to HMRC. As this will no longer be the responsibility of the PSC the 5% allowance will be removed for contracts with medium and large organisations and will mirror the same rules as the Public Sector changes from 2017. This means that 100% of the contract income will be subject to PAYE tax and NI deductions.
Where the responsibility remains with the PSC, as it will for engagements with small companies, the 5% allowance will remain.
The legislation introduces a Status Determination Statement (SDS), which must be provided down the chain to the worker and the fee payer to set out the status of the engagement and the reason for that decision. The client must have taken reasonable care to arrive at the decision for the SDS to be valid.
The client will have ‘fee-payer responsibilities’ e.g. they will be responsible for the tax liabilities, unless they pass the SDS to the worker and any agency/other party they contract with. The last party in the supply chain to receive the determination is classified as the fee payer and will then take fee payer responsibilities.
The legislation offers a client-led status disagreement process, and this will also apply to public sector engagements from April 2020. If the worker or the fee payer disagrees with the Status Determination Statement (SDS) they can challenge this decision but the client must respond within 45 days to inform the worker or fee payer, that either the decision stands and give the reasons why it has reached that decision, or give the worker and the deemed employer a revised SDS. This may only come in useful for those that are in more ‘genuine’ freelance positions who are able to put a stronger case forward?
If the client determines the engagement as inside IR35, the amounts paid to the workers intermediary/fee-payer, for the workers services e.g. a recruitment agency, will be treated as employment income. As with the public sector rules, the fee payer will be responsible for deducting PAYE tax and National Insurance and paying this to HMRC.
In a nutshell, this means that if the fee payer fails to make deductions and pay the PAYE tax and NI liability, HMRC can recover the unpaid liability from other organisations in the supply chain.
Improvements of this online tool have been and are supposedly still going to be made, but don’t hold your breath. HMRC’s tool has been subject to a great deal of controversy, pretty much since day one with contractors finding the tool difficult to use and it has also come under scrutiny as it has presented incorrect and misinformed assessments by missing out key points like Mutuality of Obligation, one of the key IR35 determining factors.
There are of course other assessment tools on the market each with different features and because of the complex nature of IR35, quite detailed with a lot of questions to answer. Although we have no direct links or relationships, we have found that positive feedback comes back from a number of parties on the IR35 Shield product: https://www.ir35shield.co.uk/
The one that makes the contract chain nervous and helps to fuel the appetite for blanket decisions because more parties can be chased, sometimes without even knowing. HMRC can collect unpaid PAYE from other parties in the supply chain, should they not be able to get it from the main source, and this will apply to all contracts in the public sector and engagements with medium and large companies in the private sector from April 2020.
The regulations authorise the recovery from a ‘relevant person’ of any amount that HMRC considers another person should have paid under PAYE regulations in respect of a deemed direct payment e.g. Inside IR35 payments.
Although these new changes do not mean the end of contractors being engaged through PSC’s in future, it will no doubt reduce the number of Limited Contractors that clients feel comfortable assessing and engaging with, especially in certain sectors.
The aforementioned ‘Blanket decisions’ by companies, whilst not popular to some, will become commonplace or there will simply be a removal of being offered a ‘Limited Company’ option when placements are presented. This is understandable due to the amount of new compliance and trust required throughout the contract chain. The end hirer will now have to work more closely with for example, an agency they recruit through, to assess the potential for Limited’s/PSC’s and/or help categorise where contractors should fall into other pay models. From what has been the norm over the last 20 years by contractors having the say on their own IR35 status, suddenly that has now been removed and passed onto other parties.
The original legislation was created to ensure that contractors operating as ‘disguised employees’, were paying the correct amount of tax and NI by taxing them in a similar fashion to those who are employed.
From 6th April 2021, Limited Company or Personal Service Companies (PSC) contractors working in the private sector will no longer be in control of assessing their own IR35 status.
IR35 affects all contractors who are operating through a Limited Company or personal service company (PSC) and this arrangement means that they can benefit from company related tax and NI savings. As it became a popular route for contractors over the years, it also created a problem for HMRC because the decision of how the rules were applied, rested solely on the contractor e.g. if they were a genuine contractor (outside IR35) or an employee (inside). Unsurprisingly, most contractors put themselves outside of IR35 and enjoyed greater tax benefits, something that HMRC disagreed with in many instances, but found hard to enforce against by having to target individual PSC’s every time they brought a case. The knock-on effect was that HMRC were not winning enough of the IR35 employment related cases which is why they have targeted the ‘upper chain’ in a move designed to have greater success and ‘self-policing’ of their policies.
The ‘off-payroll’ reforms take the responsibility away from you to decide if you are ‘inside’ or ‘outside’ IR35 on each assignment. This might sound like a big relief that you don’t have the worry or hassle of getting this wrong in future, but it’s not that simple, because the decision now rests in the hands of the end client in conjunction with the fee-payer e.g. a recruitment agency. This creates a certain panic amongst those parties making the right call because the consequences risk being liable for a tax bill. Therefore, we may start to see ‘blanket’ decisions aimed at minimising the risk, which will affect those that still have a strong case of being engaged as a Limited contractor. Likewise, it will also see those contractors who have been wrongly categorised as PSC’s in the past to consider other options, especially those in the lower pay-scale bracket.
Here are some of things to look out for if you continue to contract through your Limited Company:
As expected, the reforms will only apply to medium and large companies. Any contractors that are engaged by a small company will work the ‘old way’ and have responsibility for determining their own IR35 status.
The current rules within the private sector allow a deduction of 5% prior to calculating your PAYE Tax and NI liability which is intended to compensate the PSC for the costs of administering things like the IR35 legislation. The PSC will no longer bear the responsibility for the determination of the IR35 status of the contract or making the payroll submissions to HMRC. As this will no longer be the responsibility of the PSC the 5% allowance will be removed for contracts with medium and large organisations and will mirror the same rules as the Public Sector changes from 2017. This means that 100% of the contract income will be subject to PAYE tax and NI deductions.
Where the responsibility remains with the PSC, as it will for engagements with small companies, the 5% allowance will remain.
The legislation introduces a Status Determination Statement (SDS), which must be provided down the chain to the worker and the fee payer to set out the status of the engagement and the reason for that decision. The client must have taken reasonable care to arrive at the decision for the SDS to be valid.
The client will have ‘fee-payer responsibilities’ e.g. they will be responsible for the tax liabilities, unless they pass the SDS to the worker and any agency/other party they contract with. The last party in the supply chain to receive the determination is classified as the fee payer and will then take fee payer responsibilities.
The legislation offers a client-led status disagreement process, and this will also apply to public sector engagements from April 2020. If the worker or the fee payer disagrees with the Status Determination Statement (SDS) they can challenge this decision but the client must respond within 45 days to inform the worker or fee payer, that either the decision stands and give the reasons why it has reached that decision, or give the worker and the deemed employer a revised SDS. This may only come in useful for those that are in more ‘genuine’ freelance positions who are able to put a stronger case forward?
If the client determines the engagement as inside IR35, the amounts paid to the workers intermediary/fee-payer, for the workers services e.g. a recruitment agency, will be treated as employment income. As with the public sector rules, the fee payer will be responsible for deducting PAYE tax and National Insurance and paying this to HMRC.
In a nutshell, this means that if the fee payer fails to make deductions and pay the PAYE tax and NI liability, HMRC can recover the unpaid liability from other organisations in the supply chain.
Improvements of this online tool have been and are supposedly still going to be made, but don’t hold your breath. HMRC’s tool has been subject to a great deal of controversy, pretty much since day one with contractors finding the tool difficult to use and it has also come under scrutiny as it has presented incorrect and misinformed assessments by missing out key points like Mutuality of Obligation, one of the key IR35 determining factors.
There are of course other assessment tools on the market each with different features and because of the complex nature of IR35, quite detailed with a lot of questions to answer. Although we have no direct links or relationships, we have found that positive feedback comes back from a number of parties on the IR35 Shield product: https://www.ir35shield.co.uk/
The one that makes the contract chain nervous and helps to fuel the appetite for blanket decisions because more parties can be chased, sometimes without even knowing. HMRC can collect unpaid PAYE from other parties in the supply chain, should they not be able to get it from the main source, and this will apply to all contracts in the public sector and engagements with medium and large companies in the private sector from April 2020.
The regulations authorise the recovery from a ‘relevant person’ of any amount that HMRC considers another person should have paid under PAYE regulations in respect of a deemed direct payment e.g. Inside IR35 payments.
Although these new changes do not mean the end of contractors being engaged through PSC’s in future, it will no doubt reduce the number of Limited Contractors that clients feel comfortable assessing and engaging with, especially in certain sectors.
The aforementioned ‘Blanket decisions’ by companies, whilst not popular to some, will become commonplace or there will simply be a removal of being offered a ‘Limited Company’ option when placements are presented. This is understandable due to the amount of new compliance and trust required throughout the contract chain. The end hirer will now have to work more closely with for example, an agency they recruit through, to assess the potential for Limited’s/PSC’s and/or help categorise where contractors should fall into other pay models. From what has been the norm over the last 20 years by contractors having the say on their own IR35 status, suddenly that has now been removed and passed onto other parties.
Speak to your end client engager and your recruitment agency to get a view on how they will approach the ‘new world’ and the options within it will affect you.
You could stay in your Limited company enjoying the benefits if you get an ‘outside IR35’ SDS approval from the end hirer. You could also stay in your Limited/PSC if you get a negative SDS, but this means you will be taxed as if you are employed and pay full PAYE and NI – which means ‘what’s the point’ when you factor in the company running costs.
We are expecting less Limited engagements being offered and/or blanket decisions being made but there is life beyond the Limited company route, and we can help keep you contracting through these other options:
At Orbital, we are not looking to provide third party services for IR35 assessments backed by insurance, we are concentrating on what we do best – simple self-employed and PAYE services for any level of worker in any industry. Contact us now to find out how we can help you by emailing: compliance@orbitalservices.co.uk or by filling in the contact form.
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