WATCH OUT FOR THIS PITFALL!
Meet Joshua, he’s a joiner and works alone but he’s been offered a role in a manufacturing business. Currently, Joshua is self employed with his own Limited Company, so would much rather keep his own books, and wants to invoice the company instead. He’s done this before for many years.
“Hold on Josh, you might be about to fall into a Contractor Tax Pitfall!” – said Rachel
IR35 has been around for a long time but the rules have tightened up.
The basics of this change are that your contract is either IN or OUT of IR35 and the rules around who decides that and what they do have changed as of 6th April 2021.
What’s the benefit of being a Contractor?
The benefits of being a contractor are retaining control of your contracts – you decide which ones to take and what your terms are.
You can also enjoy tax efficiencies in the long run. The benefit to the employer is no sick, holiday leave or NI Contributions to pay.
Why the change? It was working fine before!
HMRC were concerned about “disguised employees”. It is to ensure that a contractor and an employee pays broadly the same tax.
There’s been many high profile legal cases with regards the determination of “in” and “out” of this rule so HMRC are changing who decides the Status.
What factors determine “in” Status
Factors used to determine your IR35 status include:
- Control
- financial risk
- substitution (i.e. if you were sick, you’d be able to send someone in your place to fulfil your contact)
- provision of equipment (your own van, tools etc)
- right of dismissal and employee benefits. (do you get any bonuses or perks that are the same as employees?)
If you have the same responsibilities, control and benefits as a permanent employee then you will more than likely be classed as inside IR35, and as such you should make sure you are paying the correct amount of tax.
Many of these factors will be detailed in your contract, which is why it is advisable to have an IR35 contract review and take advice from an IR35 expert before starting a new contract.
What are the 2021 changes?
Public Sector (i.e. government, NHS, Schools etc)
the hirer is responsible for working out whether the contractor falls inside or outside of IR35. If they fall inside, the hirer, agency or other third party who pays the contractor then needs to deduct tax and NICs and report them to HMRC
Private Sector (everyone else!)
When the client is a small business
- Less than 50 employees
- Turnover less than £10.2m
- Balance Sheet of no more than £5.1m
A small business ticks at least two of the above boxes. In this case, the contractor is responsible for working out whether they fall inside or outside of IR35. If they’re inside, they need to pay the tax and NICs due
When the client is a medium or large client
Your client will need to determine whether you are in or out. If you are in, they will need to provide you with a Status Determination Statement and deduct tax and NI payable to HMRC out of your fees.
The client must prove that they have taken care when deciding the status otherwise this could land both client and contractor in problems with HMRC.
Should I be worried?
As the private sector holds the responsibility for contract status decisions, they may be more inclined to tick “in” as a precaution.
However, this is bad news for a contractor when their contract should be “out” because you’ll end up paying about 14% more tax!
So, when you get private sector jobs, make sure you check, or get someone to double check the status of your contracts to ensure you do not end up paying too much tax.
CEST tool
If in doubt, HMRC has a tool to determine on a contract by contract basis whether you are in IR35 or out.
https://www.gov.uk/guidance/
Can I be both?
Yes, you can have some contracts that sit in IR35 and some that sit outside IR35 but it’s a good idea to ensure you keep a compliance document for each contract should HMRC query anything.
We hope this post has helped. If you need specialist tax advice, let us know and we’ll try our best to help you.