Seasoned contractors will be well rehearsed in the art of IR35, but if you’re new to the game it can be a bit confusing. So what is IR35, how does it affect you and what changes can you expect over the next couple years? In this blog, Patrick Gribben Head of Client Services at Intouch explains all.
What is IR35?
Contractors who operate through their own Limited Companies are entitled to certain tax relief schemes which permanent employees aren’t. To ensure those schemes are not abused, HMRC have devised a way of determining whether those who say they are self employed, truly are.
IR35 is a tax legislation which makes sure every contractor is taxed correctly, and each new contract a contractor accepts will either fall ‘inside’ or ‘outside’ IR35.
Why do contractors need to be aware of IR35?
In short, IR35 influences your take home pay so it’s really important that you understand how it affects you as a contractor. Our handy infographic displays the path contractors take when determining their IR35 status.
How does IR35 work?
Your contract is found ‘inside IR35’ – you are ‘deemed employed’ and will be taxed as such, paying income tax and National Insurance Contributions (NICs) as if you were employed. You are also no longer entitled to the same tax reliefs as those found ‘outside’.
Your contract is found ‘outside IR35’ – (which is where contractors want to be) you are classed as truly self employed, and entitled to the various tax relief schemes.
Whilst this is the basics, there’s more to how your contract is determined. Download our free IR35 guide to fully understand in detail how your status is decided and which other factors play a part.
How the sector you work in can affect your IR35 status
At present it all depends on whether you contract for public or private sector clients:
Private: Your IR35 status is determined by you, meaning it’s your responsibility to ensure it’s correct. Even with a private contract you can still be found inside IR35, so make sure you understand what deems your contract outside.
Public: The rules used to match those for the Private sector, but April 2017 saw IR35 reforms introduced to all contractors working only in the public sector. Your IR35 status is now determined by your end client, meaning it’s their responsibility to determine whether you’re inside or outside of IR35. They must also carry the tax implications should they determine your status incorrectly. If found inside IR35, you’ll be taxed at source. Evidence suggests that this has had a negative impact on the industry, causing firms to insist their contractors trade under an Umbrella agreement to relieve the burden of payroll and other administrative duties. For this reason, some contractors have avoided Public Sector roles.
What’s happened recently and how have Limited Company contractors been affected?
The decision was made in the 2018 Autumn Budget that reforms for IR35 for the Private sector will be rolled out in April 2021, to bring the rules in line with the Public sector. Many contractors are concerned about how this will affect their contracting careers, but it’s worth remembering that there’s expert advisers out there who are on hand to help.
What can we expect to happen next?
From April 2021 all contractors IR35 status will no longer be their responsibility, and will only be determined by the client / agency / end hirer. More details of how this is likely to be implemented should be forthcoming in budget statements in 2019.
How can you prepare for April 2021?
When major legislation changes occur it’s important to understand how you’re personally affected, as such changes could influence the clients and agencies you choose to contract for. Get it wrong and your take home pay could be greatly affected.
Make sure you enlist the services of a contractor accountant who fully understands these changes, and is ahead of the game when it comes to guiding you and your IR35 status.
How Intouch Accounting can help
Here at Intouch our award-winning contractor accounting service includes unlimited IR35 contract reviews, advice, risk assessments and fee protection – giving you everything you need to contract confidently, knowing your IR35 status is in safe hands.
Got a new contract? Simply pass it over to your Personal Intouch Accountant and they’ll provide you with a detailed IR35 status report, highlighting any possible areas for concern.
We are the IR35 industry experts, so get in touch today.
This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.