Changes to IR35 tax rules for hundreds of thousands of contractors come into effect from 6 April. And if you work as a contractor for a business, you must make sure you understand the reforms.
Many pressure groups say the changes are controversial and unfair. But HMRC has designed this scheme because they believe it clamps down on tax avoidance.
What are the IR35 changes?
Small and medium businesses must assess the tax status of all the contractors they hire who are classed as ‘off-payroll working’, also known as IR35.
Before 6 April, freelancers billing for their services through a limited company could decide whether they were employed or self-employed.
HMRC class these freelancers as ‘disguised employees’ because they say they work like regular employees.
As they use a limited company they pay Corporation Tax rather than employment taxes. Also, companies did not have to provide employee benefits, such as holiday and sickness pay, to those freelancers.
Under the changes, companies who employ contractors through limited will have to prove they have taken ‘reasonable care’ to assess freelancers to ensure they are working on a freelance basis.
As this is a new rule, it is not totally clear how this will work. But our view is that if someone works 37 hours a week as a freelancer, HMRC is likely to question whether that contractor is really an employee.
How can contractors prepare?
May contractors may be unaware of the changes, despite a lot of media coverage. Professional bodies, such as IPSE (the Association of Independent Professionals and the Self Employed) say many members are not sure how to respond to IR35 changes.
Our advice would be to talk to the company employing your services. While the responsibility is on the employing firm, it is better to check rather than face HMRC scrutiny later. If it turns out that the contract does not satisfy new IR35 rules, both parties could face penalties.
Some companies may require that contractors are employed via an ‘umbrella company’. These work by collecting your earnings, deducting tax and National Insurance contributions before paying you. You effectively become an employee of the umbrella company rather than the firm who issues the contract.
Again, our advice would be thoroughly research such company set-ups before making a decision. Umbrella companies are unregulated, so you must beware of unscrupulous operators, too.
If you want advice on IR35 or need an accountant to sort out your freelance accounts, contact us today.