19.11.19

IR35 Myths debunked

19.11.19

It would be really difficult to give an exact number on how many people work as a contractor in the UK these days, however according to most recent estimations the total number of Freelancers is around 2 million. The most popular industry for this employment – as you guessed – is IT.

The possibility to undertake contracting employment is good for both the economy and employees. It provides flexibility for the UK job market; therefore, a bigger amount of skilled workforce is attracted to the country and provides valuable contribution to the economy. On the other hand, freelancers are not bound to the same job for several years, they are allowed to work on several projects at the same time and therefore they can improve and gain more diverse skills.

As we can see it’s a win-win. Some may say why do we need a new intermediaries legislation (notoriously known as IR35) coming into effect on the 6th April 2020 then? And most importantly, what is it going to change and on what merits is it going to change?

The IR35 legislation is not a new concept, it was first introduced in 2000 to ensure that contractors are paying the right amount of taxes, by making ‘disguised employees’ subject to PAYE tax. The idea behind this concept is to avoid contractors paying less tax than employees. Until 2017 contractors were responsible for deciding whether they fell inside or outside the IR35 both in private and public sectors. As of 2017 contractors working in the public sector lost their ability to determine their IR35 statuses, it became the responsibility of the organisation they were contracted by. As of next April, the same thing will apply in the private sector: it will be the organisation’s responsibility to make sure whether their contractors are paying the appropriate amount of contributions.

So, this is all great, but what does it mean in practice? Who is a disguised employee? And who is deciding if I am a disguised employee?

It’s HMRC deciding whether you are a disguised employee, therefore you will be within the IR35, or a real contractor, therefore you will remain outside of it. It depends on several factors, most of them enclosed in your employment contract. If you are working under a Personal Service Company, but basically you are engaged in continuous, exclusive employment, you are sure within the IR35. Exceptions in cases are when you are contracted by a small organisation. Yes, to make things a little more complicated, there will be two separate frameworks for off-payroll engagements.

If you are paid on a project-by-project basis, not monthly, running your own business and contracting for several companies, institutions, you’re not provided with equipment by your client and you don’t have employees reporting to you it’s highly likely you will remain outside the IR35.

As these regulations will be in effect from 6th April, lots of contractors, who are currently working for companies as ‘disguised employees’ will have the option to change for permanent employment, or pay extra contribution under the IR35. Also, HMRC can go back at least 6 years to investigate and determine whether your activity fell inside or outside IR35 and might request you to pay any outstanding fees and interests.

To calculate how much you will need to pay under the IR35, you need to deduct your PAYE Tax and any pension contributions. You might be able to deduct some allowable expenses such as travel from your turnover.

As you can see it’s not 100% straightforward to decide whether you will be inside or outside of IR35, to make sure you need to check HMRC’s employment status for tax (that you can do here: https://www.tax.service.gov.uk/check-employment-status-for-tax/reason-for-using-tool) and I’m also happy to have a chat with you and provide further assistance!

 

Dora Pasztor

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