What you need to know about IR35

Familiarising yourself with numerous legislation is just one of the many tasks involved in setting up your own business. But for contractors, specifically, there’s a crucial piece of legislation to get to grips with: IR35.

 

What is IR35?

IR35 is a type of tax legislation put in place to prevent contractors from limiting their tax liabilities by supplying services through a Limited Company, despite carrying out the same work as the company’s employees. In short, it’s designed to stop false self-employment.

 

Does it affect all contractors?

HMRC defines ‘disguised employees’ as contractors who are treated and act like any other member of staff working for a company. IR35 law aims to stop disguised employees trading under an intermediary, which would entitle them to greater tax benefits.

It may seem simple on paper, but in actual fact, many contractors have found it difficult determining whether or not the legislation applies to them. Trading as a Limited Company and working ‘outside’ of IR35 can result in higher take-home pay than an Umbrella agreement, but you need to be certain about your position or you could face financial penalties.

Another thing to bear in mind is that the legislation applies to each individual contract. This means that you might be outside of IR35 for one contract, but within its scope for another. And that’s why it’s important to conduct thorough contract review processes, in order to clarify if any part of your work falls inside the legislation.

 

What penalties could I face?

Contractors found to have been ‘careless’ can be fined 30% of unpaid tax. This climbs to 70% of unpaid tax if the contractor was aware they were inside of the legislation but deliberately did not make the payment; and 100% of unpaid tax if they also tried to conceal their actions.

 

Whose responsibility is to determine IR35 status?

Big changes were introduced from April 2017, which saw the responsibility of determining IR35 status move from the contractor to the client. But this is only where the contract is with a public sector body. The government are currently also debating rolling it out to cover the Private Sector, although this is likely to take some time, if it happens at all.

Some 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.

 

Pairing up with a professional

If you’re considering setting up as a contractor, the experts at Intouch Accounting can help you to navigate the minefield that is IR35. We’ll make sure you understand your rights and risks under IR35 and other laws, and will review your contracts for compliance. To find out more about our service, 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.

 

 

 

 

 

 

Spring Statement 2018

Today saw the Chancellor Philip Hammond deliver his first ever Spring Statement and we’re pleased to say that the future is looking positive for contractors. The Chancellor was upbeat about the recovery of the UK economy and spoke of continued investment in public services and large infrastructure projects. The announcement of a consultation on extending tax relief on training funded by the self-employed plus a review of late payments made to small businesses both also bode well for the future.

We had our ears open for news of the IR35 private sector consultation that was announced in the Autumn Statement last year, and although it wasn’t mentioned in the announcement itself, further information published following the Chancellor’s speech has confirmed that a consultation will be published in the coming months.

Philip Hammond’s written statement announced: “In the coming months the Government will publish: Off-payroll working – a consultation on how to tackle non-compliance in the private sector, drawing on the experience of the public sector reform. The Government will work with businesses and individuals to mitigate the potential administrative burdens of any future changes.”

We would now urge the Government to take time to consider the right approach based on input from across the industry and will of course keeping close to any future announcements.

The IR35 saga has been rumbling on for so long that you may have lost track of the backstory. So, if you want a quick potted history of IR35, what’s happened, why it matters and what might happen next, then read on…

What is IR35?
IR35 is the tax legislation which determines whether an individual is truly self employed, or working as a ‘disguised employee’ in permanent employment in order to take advantage of certain tax relief schemes which permanent employees cannot. If you are ‘inside’ IR35 you are considered a permanent employee and will therefore be taxed as such. If you are considered to be ‘outside’ IR35, you are considered self employed. IR35 applies to all business sectors and specialisms and your status can vary from contract to contract, depending on the nature of the work and details of the contract.

Until April 2017, the contractor was responsible for determining whether their contract was inside or outside of IR35, according to the rules set out by HMRC.

IR35 in the Public Sector
From April 6th 2017, legislative reforms meant that the burden and responsibility of determining IR35 status for Public Sector Contracting was now with the client, not the contractor. This legislative move was perceived by some commentators as HMRC ‘testing the water’ in advance of potentially rolling out the reforms to the Private Sector.

However, the implications of the Public Sector reforms have been more wide-reaching than anticipated, with Public Sector entities like the NHS blanket-applying IR35 across all contracts for fear of getting it wrong and incurring fines. Not wanting the associated administrative burden of payroll management, they also insisted on their contractors using umbrella companies. This double whammy of having the Employer’s National Insurance costs passed down to the worker (and not borne by the Engager) plus the cashflow disadvantage of being taxed at source and still having to pay the umbrella fee left contractors substantially out of pocket. Many decided to work elsewhere, return to permanent employment, or work only in the Private Sector in future if their skills were transferrable.

IR35 in the Private Sector?
Following speculation that the IR35 reforms might be rolled out into the Private Sector imminently, contractors were relieved by the announcement in the November 2017 budget that a full review and consultation would be carried out before any decisions being made. We’ll be watching closely for the results of this consultation which may be published in the coming weeks or months.

If you have any questions relating to IR35 or want to find out more about our Contractor Accounting service, call us now on 01202 375 562.

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.

IR35 consultation hot off the press

IR35 consultation

HMRC has now published the anticipated consultation on IR35 and the public sector, following closely on the heels of the announcement made in this year’s Budget and the discussion document in 2015.

 

The consultation centres on a new online test that HMRC expects engagers to use to determine a worker’s status and therefore the tax they will suffer at source. The reliability and acceptance of that test is critical to the fair application of the new rules. HMRC are inviting interested parties to offer to assist in the development of this test. Intouch has already registered its willingness to contribute to the development of a test that is appropriate, fair and consistent with the legislation and case law, and not just HMRC’s view of the world.

 

We will be submitting a response in defence of the genuine self-employed contractors and we urge everyone who has a vested interest to respond to the consultation. It is our chance to influence HMRC’s understanding of our market and attempt to contribute to the shape of the future of tax, not only for public sector contractors, but the wider freelance and contracting market.

 

The consultation can be found here and it invites all to respond, so let’s have our voices heard.

We’ve unpicked the consultation to see just how fair it is…and whether it really is a consultation. Read our findings in our blog posted on Contractor UK.

 

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.

Where does the ‘Budget for the future’ leave contractors now?

The Budget for the future?

It was billed as the Budget for the next generation, promising to offer long-term solutions to long-term problems. But what do Osborne’s plans mean specifically for contractors and freelancers?

 

After a weekend of media speculation, we tuned in at 12:30 today to find out exactly what the Chancellor had packed in the Red Box. Now we know. Here Intouch Accounting Director Duncan Strike, who is well used to unpicking the implications behind the announcements, identifies the three most important announcements affecting Limited Company contractors.

 

1. Personal service companies and the public sector

What transpired today was the announcement of a consultation that specifically targets contractors working through their own Limited Company for public sector bodies (including teachers and NHS workers).

 

In essence, if the consultation proceeds, this means:

 

  • the public sector body or agency paying the personal service company (PSC) must assess ‘employment status’
  • HMRC will provide ‘simplified tools’ for this purpose.

 

Furthermore, where employment status is found:

 

  • the fee due to the PSC, excluding VAT, will be reduced by 5%, then
  • Income Tax and Employee’s NI will be calculated and deducted before the PSC is paid
  • the PSC will no longer be responsible for Employer’s National Insurance (NI); this will be met by the client or agency
  • the combined deductions from the PSC and the Employer’s NI will be paid by the client or agency.

 

The proposed treatment of Employer’s NI is inconsistent with existing IR35 rules and it’s a wonder how this will be addressed in the final legislation. However, the principle of passing the Employer’s NI liability to the client or agency appears fair and likely to result in a proper consideration of status. Most consultations lead to legislation; it is reasonable to consider these changes will occur in substantially the way proposed.

 

It’s also likely that this or a separate consultation will look at IR35 further and in particular seek a simplified means of assessing status. We’ll be watching this space very carefully and reporting as the situation emerges and develops, as well as taking part in the debate.

 

2. Disguised remuneration and tax avoidance

For many years’ promoters of tax avoidance have offered tax schemes using Employee Benefit Trusts and loans to avoid Income Tax and NI. HMRC are to be given new rules that enable them to cancel out the tax advantage and possibly tax existing loans, remaining outstanding on 5 April 2019, in what might be considered a clever way of backdating the legislation. Contractors having used such schemes should be wary and prepare to consider the full effect as proposals develop into law.

 

3. Directors loans

The new dividend tax effective on 6 April 2016 means that dividends falling in the higher rate band will be taxed at up to 32.5%. Some commentators had identified that taking loans from your company may have offered a cheaper (tax) alternative.

 

The Chancellor has clearly identified this too and has now increased the tax on loans to directors or shareholders, taken from your company from 6 April 2016, to the same 32.5%..

 

Read more about the new dividends tax in our full ebrief.

 

We’ll be releasing our full Budget analysis tomorrow, specifically to help contractors and freelancers make sense of Osborne’s announcements. While we apply our expertise, tell us your initial thoughts about the Budget that Osborne believes puts family and future generations first.

 

Has George done enough to support small business owners? Share your reaction by leaving us a comment.

 

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.

Contractors urge Osborne to keep his focus in this week’s Budget

This week’s Budget

The pre-Budget media train has been in full motion over the weekend with genuine personal service companies (PSCs) all being wrongly tarred with the same tax avoiders brush. Trading through a personal service company is perfectly legal and above board. That is the correct starting point.

 

Surely if that premise was untrue all of these heinous crimes would have lead to fines or custodial sentences, or perhaps just changes to the legislation to catch the baddies. But that hasn’t happened.

 

FCSA is rightly pleading with Osborne to ”get his facts right before tarnishing all contractors with the same brush ahead of Wednesday’s Budget”. Contractors and freelancers are a valuable part of the UK’s workforce and those operating legitimately should not be punished as government look to clampdown on abusers.

 

Intouch supports tightening of the rules to make the system fair and just, but are singing from the same hymn sheet as FCSA in urging government not to attach genuinely independent workers who bring their highly valuable knowledge and experience into companies when they’re needed.

 

What’s likely to come up on Wednesday for contractors?

Contractors are already expected to deal with changes to the way dividends and expenses are taxed. Here’s what will be of interest on Wednesday lunchtime:

 

  • Dividends – the current tax credits will go and the new dividend tax kicks in on 6th April. Our Dividend ebrief tells you more about the new rules, what they mean and what you can do to make the most of your dividends.
  • Travel and subsistence expenses – any contractors who are under the supervision, direction or control (SDC) of their client will lose tax relief of their T&S expenses. This is likely to hit Umbrella workers the hardest as well as any contractors operating within IR35.
  • Stamp duty on second homes – any contractors with a second home will have to pay a 3% Stamp Duty surcharge.
  • IR35 – silence was golden in the Autumn Statement in which IR35 was put to one side. But we’re expecting it to raise it’s head again now Spring is here. The discussion document issued last year will most likely progress to consultation and we already know to expect an improved Employment Status Indicator Tool by the end of this year.
  • Income Tax threshold – it’s expected that the Personal Allowance will rise to £11,000. We also anticipate seeing the higher rate income tax threshold rise, probably to £43,000, as government continue to edge towards their longer term target of £50,000.
  • Company liquidations – changes likely to come into effect on 6th April mean any contractor looking to wind up their company but then continue contracting will have their distributions chargeable to Income Tax, rather than Capital Gains Tax. In short, this is a huge blow to the plans many contractors had to close down a company without perhaps retiring for good.

 

Other speculation

It’s more than likely that the Chancellor will continue with his focus on tax avoidance and clamping down on those who use marketed schemes to avoid paying their fair share.

 

Rumours are being leaked about Osborne reverting back to the old limit of 40p additional income tax rate band. It’s also unclear what the Chancellor will announce about pensions. While talk of major changes to the system of pension tax relief is making its way around the rumour mill, it seems more likely that there will be a reduction in benefits currently enjoyed by savers. If this proves true on Wednesday then now doesn’t seem like the right time to further reform pensions.

 

48 hours to go

With the Budget less than 48 hours away, the speculation will keep going round until the Red Box is opened in the House of Commons. We will be watching with interest and unpicking exactly what Osborne’s announcements mean for contractors. Make sure you’re in the know. Keep an eye out for our Budget special blog.


In the meantime, download our 2015/16 tax yearend ebrief to ensure you’re making the most of your money before 5 April.

 

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.

Budget changes: IT contractor worries in 2016

Budget changes amongst top worries for IT contractors in 2016

 

With the 2016 budget just around the corner, we look at the key concerns of the IT contractor sector and the challenges that the new budget may pose.

 

When we talk about contracting, people often think about IT contractors first. This is in part due to the historical demand for contractors in the IT industry, who often amass a huge breadth of experience by working for lots of different clients.

 

Research by IPSE, the Association of Independent Professionals and the Self Employed, shows a 71% increase, over the past seven years, in the number of independent professionals working in Information Technology and Communications.

 

This steep rise in interest is likely to be thanks in part to the lucrative contracts often enjoyed by IT professionals, who tend to receive financial benefits beyond what their permanently employed counterparts receive.

 

Nevertheless, even the IT sector faces challenges ahead in 2016. According to CUK, demand for temporary technology workers has slowed over the last two years. However the market for freelance IT skills as well as hourly pay rates are still growing.

 

Another area of opportunity for the IT industry in 2016 is to promote itself more to women. In a previous article on women in contracting that I wrote for IPSE, I discussed how the IT industry is taking steps to attract more women to IT roles and to get more school age girls interested in coding.

 

The inaugural Women in IT Awards launched in London last year with the aim of celebrating the outstanding innovation achieved by women in the IT industry. Despite all this, more still needs to be done to remove the existing boy’s club reputation of the IT industry.

 

In an article on recruitment website Uniting Ambition, recruiter Tina Bicknell says it’s difficult sourcing women for programming roles and that this is a genuine issue for the sector. In her article, Tina believes women are drawn to management rather than coding – a product of industry stereotyping.

 

State of the IT Nation

So how are such IT professionals feeling about the state of the industry and contracting in general? We wanted to find out so, in December, Intouch carried out a survey – including both permanent employees and contractors – to get a better picture of the IT landscape.

 

Looking ahead to 2016, those polled who are already contracting or freelancing said the 2016 Budget, proposed changes to travel and subsistence (T&S) and the negative impact on take home pay were their top worries, each with 16% of the votes.

 

Many of our respondents had completed the survey prior to the publication of the draft Finance Bill, released on 9th December. Those who are Umbrella workers now know for certain that they will lose tax relief on T&S expense claims in April this year – a huge blow to them.

 

Those operating their own Limited Company breathed a huge sigh of relief as it was confirmed that if they are truly independent and are not “disguised employees” (outside IR35) they can still claim tax relief on T&S after April 2016.

 

These hot talking points were closely followed by changes to dividends, which was the main worry for 15% of temporary IT workers.

 

They are right to be concerned as Limited Companies have not escaped entirely unscathed by recent tax changes. From April 2016 the way dividends are taxed is changing to increase the amount of tax paid, although the first £5,000 of dividends will be tax free. Overall, post April 2016, most Limited Company workers remain financially advantaged over Umbrella company employees.

 

IR35 is another key worry for 13% of contractors. The proposed changes to IR35 (Intermediaries Legislation) is something I have discussed at length in a previous blog and although no announcements were made in the Autumn Statement it’s unlikely this debate is over.

 

Understanding the ins and outs of IR35 is certainly a complex issue. My advice to anyone who is concerned about the proposed reforms or their compliancy position is to speak to a contractor accountant to find out where you stand.

 

Another subject I have frequently discussed on the blog since the 2015 Budget was announced is the proposed changes to supervision, direction or control. This is a worry for 12% of IT contractors and freelancers.

 

The thought of HMRC investigations is keeping another 12% of IT professionals up at night. This is a worry we are well aware of at Intouch, which is why we now include professional fee protection cover in our all-inclusive monthly services – it means our clients are covered if HMRC raise an enquiry into their tax affairs or challenge their IR35 status.

 

Some of the IT professionals we spoke to are not currently contracting, although over half (56%) have done so previously. Of those we spoke to in permanent employment, nearly two thirds (60%), would not consider contracting in 2016, whilst one in five (20%) are very likely to take the plunge.

 

The number one concern preventing 29% of employed IT professionals from contracting is the perceived fear of leaving the ‘safety’ of permanent employment. This is followed by personal worries for 22% of employed respondents, such as family commitments, personal finances and keeping on top of mortgage repayments.

 

When speaking to IT contractors and freelancers about their trading model, over two thirds (69%) are using a Limited Company – a significant majority. Of the remainder, 17% are using an Umbrella Company and 11% are classed as self-employed, either as a Sole Trader or partnership.

 

Reasons for going Limited include having greater control and independence, tax efficiency and being able to operate as a small family company. Those operating through an Umbrella company said flexibility and low cost when not working were the main appeals. For the self-employed (Sole Trader / partnership), being able to spend more time at home with their children was a major benefit.

 

If you are unsure which trading model to use, our popular guide Limited Company or Umbrella – which is the right choice for you? explores the different trading models available to you and which is best for your circumstances.

 

When it comes to managing their finances, 44% of IT contractors and freelancers use a specialist accountant. Nearly a third (31%) are using a high street accountant and 13% are doing their accounts themselves. The survey also shows 6% of people are using online accountancy software to do their accounts.

 

Whether you’re an employed IT professional considering a move to contracting or a seasoned temporary worker looking to maximise your earnings, our team of expert contractor accountants can help you work out what trading model is best for your circumstances. Speak to us today on 01202 375562 or email enquiries@intouchaccounting.com

 

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.