Recent changes to the IR35 rules affecting the public sector are to apply to the private sector from April 2020. The change shifts the onus on determining a contractors’ tax status from the individual with her/her own service company to the business contracting with that service company.
What is IR35?
The IR35 rules were introduced to prevent individuals from setting up and trading through a company in order to avoid tax and National Insurance contributions. Originally, the onus was on contractors to evaluate their own tax status. In 2017 the Government changed the rules for public sector organisations making it their responsibility to determining the correct tax status. If a public organisation determines that without a service company the individual would be their employee then the organisation must deduct tax and national insurance at source. The public organisation, and not the individual, is liable for any failure to deduct plus interest and fines.
Extension to the private sector
In the 2018 Budget the Government announced that the obligation to determine tax status of a contractor previously only applicable to the public sector will be extended to medium and large private sector organisations from April 2020. From next year, private organisations will also bear the burden of determining the tax status of their contractors.
When the change was implemented in the public sector there was a dramatic effect with an estimated 90,000 individuals being taxed as employees in the first three months of the rule change.
Providing services through your own limited company? What should you do?
The application of the rules to the private sector is likely to impact how private businesses choose to engage with contractors; many companies will be reluctant/wary of using individual contractors.
If are using a personal service company to deliver services, you should consult your accountant and ensure that you are confident of your tax status. A recent article in the Guardian suggests (on the basis of what happened in the public sector) that the stretching of the rules to the private sector may see contractors suffer a reduction in take home income by as much as 30%.
Many private organisations may decide not to take any risk and put their contractors on the payroll. This arrangement may work well for individuals if they are offered employment on acceptable terms and if the level of remuneration allows them a comparable level of income.
If you would like advice on employment status, the terms of employment you have been offered, or if you need help in drafting a consultancy agreement, please contact David Greenhalgh on email@example.com or 020 7580 5721.
This article is for reference purposes only. It does not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking or deciding not to take any action.
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