April 6th 2021 is an important date in next year’s calendar. It is the date when new tax legislation will come into effect that 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 means medium and large private sector companies will be responsible for determining a freelancer or contractor’s employment status for tax purposes, or “IR35 status”, and then tax the contractor’s earnings as employment income if applicable.
The rules are already in place in the public sector and have seen a big reduction in the hiring of limited company contractors with more flexible workers being hired on payroll.
Dave Chaplin is CEO and founder of contracting authority ContractorCalculator and IR35 compliance solution IR35 Shield. He is also the author of IR35 & Off-Payroll Explained. Here he outlines what contractors should do before April 2020, and why.
Educate your client
If clients ignore or delay addressing the legislation, projects will suffer. In the public sector, hirers who were faced with the tax liability risk that comes with the new rules were inclined to issue blanket bans on limited company contractors and many private firms have already taken similar steps.
So, it is vital that, as a contractor, you explain the impact of such actions to your client and warn them of the consequences. These may include:
Clients need to recognise that the accumulative cost of refusing to engage contractors who are genuinely ‘outside IR35’, via their limited companies, could be potentially very damaging. But the impact can be effectively mitigated, providing hirers adopt the correct compliance solution.
Talk to clients and establish their approach to the Off-Payroll rules and their plans around their contracting workforce. Take the initiative. You don’t want April 2021 to be fast approaching when your client demands that all contingent workers be put onto an agency payroll, as some large firms have done.
Secure an outside IR35 contract
Opportunities outside of IR35 will be available, and some positions will even be advertised as such. But they 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.
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.
Calculate rate renegotiations for ‘inside IR35’ contracts
If you’re considering an ‘inside IR35’ engagement under the new legislation, understand the financial impact that the Off-Payroll rules have on your income.
Working ‘inside IR35’ under the new regime will impose an employment tax liability on your client and/or agency, as well as 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. But, bear in mind that they will be wishing to renegotiate too and want to pass their new tax bill onto you.
If the ‘inside IR35’ status determination has come about because of a risk-averse client refusing to conduct a considered assessment, you could attempt to renegotiate your rate to counter your tax hit if you feel your bargaining position is strong.
Likewise, if the client has other contractors they can swap you out for, who will take a rate cut, then the outcome may not be what you wish.
The challenge some clients and contractors will face is the impact of the withdrawal of tax relief on expenses previously claimable. For a contractor who travels and lives in accommodation close to your site during the week, if they are ‘inside IR35’ then to maintain the same level of take-home pay, the total cost of hiring could increase by around 40%, which may make the hire completely untenable.
Avoid 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, be aware that the taxman could use the overturning of a contractor’s IR35 status as a solid reason to open a tax enquiry.
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 seen a rise in non-compliant schemes with many contractors unwittingly duped 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 2021 is only a matter of months away so my advice to contractors is act now to plan for your contracting futures.