Ian Smart – Product Architect
The changes to IR35 tax rules are going to offer tax and life planning opportunities…
The Intermediaries Legislation became law in 2000. It was introduced in response to the growth of what the government termed ‘disguised employment’ – particularly in the IT industry.
By working via a limited company, a worker could pay less tax than a traditional employee performing exactly the same role. The IR35 rules apply to contracts which are performed in the manner of an employee rather than a self-employed person working in business on their own account.
Although the tax benefit associated with working via a company has gradually been eroded over the years, there is still a significant financial cost if your work is caught by IR35.
While there have been calls for and promises of a review of the IR35 rules, off-payroll working rules are currently set to change on 6 April 2020.
From this date, all public authorities and medium- and large-sized businesses in the private sector will be responsible for deciding the employment status of workers rather than the worker having that responsibility. The private sector includes third sector organisations, such as some charities.
The rules apply to private sector companies that meet 2 or more of the following conditions:
- An annual turnover of more than £10.2 million
- A balance sheet total of more than £5.1 million
- More than 50 employees
How will contractors be paid if caught by IR35?
In some cases, a contractor may only be offered the role if they become a traditional PAYE employee, or they may take up the contract and operate via a PAYE umbrella company.
If they take the role as a limited company contractor, their fee-payer/client will be responsible for making the appropriate deductions from their turnover. This includes income tax and employee’s national insurance contributions.
The fee payer must also make deductions for employers’ national insurance contributions and the Apprenticeship Levy. But the contractor will still be responsible for any additional tax due as it’s possible for one contract to be treated in one way with others treated differently depending on the circumstances.
However, one of the most unfair aspects of IR35 is that if a contract is deemed to be caught by IR35 and the contractor continues to operate through a personal service company, then they will be taxed as an ’employee’, but have none of the statutory employment rights associated with traditional workers. There will be no entitlement to benefits such as holiday pay, statutory sick pay, maternity or paternity pay, pensions or redundancy.
But things are different if operating via a PAYE umbrella company. A contractor is an employee of its chosen umbrella employer and with that comes a responsibility for the umbrella firm to provide all normal HR functions of any employment relationship.
Umbrella employers provide contractors with full employment rights, all statutory benefits including holiday pay, maternity pay, paternity pay, sickness pay, pensions, redundancy pay and adoption pay. The contractor has the best of both worlds.
The stability and benefits of being employed whilst also having the freedom and flexibility to undertake contract work for numerous end-clients.
Even when undertaking placements for different recruitment agencies, there is continuity of employment. This history can be particularly important for anyone looking to access personal finance such as mortgages or loans.
For anyone working on very short-term contracts or working for multiple clients simultaneously, the umbrella consolidates earnings from the various assignments into one pay packet.
This means that all tax and national insurance contributions are taken care of together for the contractor, rather than having to consider earnings from each assignment separately.