IR35 changes are coming into force in the private sector in April 2020 following discussions of the IR35 changes in the public sector over the summer of 2018. Originally expected in 2019, the delay highlights the fact that this is one of the biggest changes in regulations for contractors in some time.
The scale of these regulatory changes, alongside negative reactions to the public sector legislation change, has many contractors concerned about the changes. But how will they impact you?
IR35 is a piece of legislation that determines whether an individual working via a limited company should be classified as self-employed or an employee for tax purposes.
Originally introduced in 2000, IR35 saw it’s biggest change in 2017 when responsibility for determining the IR35 status of a particular role moved from the contractor to the public sector organisation engaging the limited company.
The legislation lays out precisely when someone operating through a limited company can be classified as self-employed and when they should be deemed as an employee for tax purposes, allowing HMRC greater clarity and reducing the potential for contractors to take advantage of tax efficiencies on offer.
IR35 regulations for the private sector are now following the path laid out in the public sector changes in 2017. In short: the organisation engaging the contractor will be responsible for deciding if they fall within IR35 or not.
Failure to correctly clarify the IR35 status of contractors could lead to punishments including financial penalties for businesses, putting them under great pressure to get it right. As a result of this, concerned organisations may choose to ‘play it safe’ and engage fewer contractors, or decide that any contractor is now deemed an employee for tax purposes.
These regulations will only apply, however, to medium and large organisations. Contractors engaging with small businesses will still be responsible for determining their own IR35 status.
HMRC have confirmed that they will define a small business using similar criteria to the Companies Act 2006 to which they must satisfy two of three following;
If a contractor solely contracts for small businesses, these changes should not concern them, with the responsibility of correctly determining IR35 status remaining with the director of the limited company.
Contractors working for medium and large organisations, however, will be reliant on the organisation engaging them to ensure they are classified correctly for IR35. Although this may be less pressure for the contractor, as the responsibility for determining your IR35 status is now out of their hands, organisations may choose to be cautious and classify their role as inside IR35.
Being incorrectly classified as a worker rather than a contractor will increase a contractors tax obligations, potentially reducing their take home pay significantly.
If you are a contractor and are going to be contracting for medium or large organisations when the new legislation comes into place, it is vital that you take steps to ensure your role within the company is correctly laid out within your contract well in advance. Doing so will ensure you are not subject to any nasty surprises during the course of your contract.
Double-checking your status before taking on any future contracting work will also ensure that you and the organisation engaging your limited company are on the same page with regards to your status, again reducing potential confusion.
As a contractor you know your industry better than anyone, work hard to understand the position of businesses and work closely with your accountant to ensure your finances are in order should any future contracts fall inside IR35.
If you have a question about IR35 you can contact our specialist accountancy team today. Your own dedicated accountant will work alongside you to ensure you are completely prepared for the upcoming changes and your contracting firm can continue to grow.
Call us on 0333 3323 1199 or request a callback today to learn more about our services.