What are changes to IR35 off-payroll?
The government’s changes to off-payroll working rules also referred to as IR35, have been in effect from 6 April 2021. This has forced many contractors working through a limited company to rethink their position.
Some have moved into permanent employment while others have started working through an umbrella company. It’s possible to pursue working through a limited company even if your current contract is considered to be inside IR35.
You’ll need to ensure you pay the correct income tax and National Insurance Contributions (NICs) for any arrangement inside IR35 because you are an employee, in the sight of HMRC.
What is IR35?
HMRC has defined IR35 as ‘off-payroll working’. This is a tax legislation designed to spot disguised employment. IR35 was introduced in April 2000 and took its name from the first press release published by HMRC. It uses criteria to determine whether contractors and businesses are avoiding paying the correct amount of tax by working as disguised employees.
The three main criteria are:
- Direction/Control: the amount of control the client has over what, how, when and where the worker completes their contract.
- The right of substitution: can the worker send a substitute on their behalf?
- Mutuality of commitment: is the employer committed to offering work and the worker obliged to accept it?
When the rules apply?
As per HMRC, IR35 rules will apply in the following situations:
- If a worker provides service to the end client through an intermediary, they would be considered an employee if contracted directly.
- A contract for the off-payroll working rules is a written, verbal, or implied agreement between parties.
- IR35 status will differentiate from contract to contract. A worker could have contracts both inside and outside IR35.
The IR35 rules mainly target contracting work. If you work as a contractor through a limited company, you get to deduct all your business expenses and only pay 20% Corporation Tax on your profits. In addition, you can avoid paying NICs by paying yourself through dividends.
Hence, contracting through a limited company is more tax-efficient than working as an employee or working via an umbrella company. To remove this unfair tax advantage enjoyed by contractors over others working in the same way, the government has decided to use IR35, which will increase its overall tax revenue.
Who decides if a contract is inside or outside IR35?
From 6 April 2021, the responsibility for deciding whether a contract is inside or outside IR35 sits with the public authorities and medium-sized clients outside the public sector. If your agreement falls under IR35, you must pay Income Tax and National Insurance Contributions as if you were employed. This can reduce your net income by up to 25%.
Being engaged by a small company
According to HMRC, small companies are exempt from taking decisions on IR35 status.
At least two of the criteria below must be met to be classed as a small company:
- Sales of no more than £10.2 million.
- Balance sheet total of no more than £5.1 million.
- No more than 50 employees.
If a small company engages you, you retain the responsibility for determining IR35 status.
If you are inside IR35
Even if your contract is deemed to be inside IR35, it is still possible for you to work through your limited company. However, you need to pay the correct PAYE tax and NICs for any contract under IR35.
An inside IR35 contractor will inevitably earn less money unless they can negotiate an increase in their day rate (which we would recommend). Still, there are a few other reasons to retain the limited company.
Is your limited company still the best option?
After the government’s changes to off-payroll working rules in April 2021, many contractors are concerned about whether contracting via a limited company is still the best option.
Some contractors have stopped contracting and have sought permanent employment, while others have chosen to work through an umbrella company. An umbrella company streamlines the process of paying your taxes and provides employment rights. However, you will lose your autonomy and may hinder your brand and reputation, built over time, if you close your limited company entirely.
Below are some reasons for a contractor to retain a limited company:
- If the contractor is working on multiple contracts and one falls under IR35, or the contract inside IR35 is short-term, or he expects to work on contracts that are ‘outside’ IR35.
- If the contractor works through a limited company, his liability as a director is limited if something goes wrong.
- The contractor retains the ability to accept contracts both ‘inside’ and ‘outside’ IR35.
- If the end client is deemed ‘small’, the responsibility of deciding IR35 status sits with the contractor. This will entitle the contractor to a 5% tax deduction for business expenses.
- Even if the contract is ‘inside’ IR35, using a limited company could provide more opportunities for future pensions planning.
- A slightly higher take-home due to extra income from the flat rate scheme could retain a contractor’s limited company.
Since everyone’s circumstances are different, contractors need to look at the details carefully before deciding what is the right thing for them to do. If your contract is inside IR35 and you choose to work through your limited company, the end hirer will add you to their PAYE system to pay Income Tax and NICs, just like an employee. The take-home pay can be delivered to your limited company. But you should bear in mind that you will be paying all the tax that an employee would, with none of the benefits. You also need to pay your accountancy fees, insurance, and other costs out of your own pocket.
Alternatively, an umbrella company can be a stress- and hassle-free option for getting paid while you contract. You will also be entitled to benefits like holiday pay, sick pay, and other employee benefits.
Is it better to be inside or outside IR35?
If your contract is under IR35, it falls under the off-payroll working rules and HMRC treats you as an employee for tax purposes. Being outside of IR35 means your contract is treated as self-employment, which allows you to operate tax-efficiently.
Can I still work outside IR35?
Can I still work through my limited company business after April 2021 if I fall outside IR35? Yes – If you are currently working through your own limited company, you may do so in the future if your end client has confirmed that your contract is not subject to IR35.
Do I still pay Corporation Tax if inside IR35?
If your end customer determines you to be in IR35, the fee-payer in that engagement will deduct employment taxes at the source. When calculating Corporation Tax, the deemed employment payment and Class 1 Employer NICs can be deducted, lowering your Corporation Tax burden.
Do small companies fall under IR35?
The new IR35 laws only apply to private sector medium and large corporations, and all public sector companies. Clients who are categorised as small businesses, as defined by the Companies Act 2006, are exempt.
Does IR35 affect the self-employed?
IR35 does not apply to sole traders because the legislation only applies to incorporated businesses. However, everyone who delivers a service to a client, even sole traders, is affected by the laws concerning the designation of employment status, which are closely linked to IR35.