Last month saw the end of the Government’s formal consultation on proposed changes to off-payroll in the private sector. The changes are likely to have a significant impact on some limited company contractors when they come into effect in April 2020.
What are the proposed changes?
The changes to off-payroll in the private sector have been proposed as the Government wants to ‘increase compliance in the private sector’ with the IR35 rules. You can read our robust response to the formal consultation on off-payroll working here. Under the proposals, end hirers (the organisations you carry out work for) would become responsible for determining whether you are inside or outside IR35. Until now, that responsibility has rested with you as the contractor, rather than your end hirer or recruitment agency.
It’s important to note that the criteria for determining IR35 status would not change. If you are not subject to IR35 now, you won’t be subject to IR35 in April 2020. The difference is that liability for determining IR35 status and, potentially, for the under-payment of tax, is shifting.
What effect will this have?
In some cases, end hirers may provide individual IR35 assessments and be comfortable with responsibility for determining IR35 status, in which case, provided they agree that your assignment is ‘outside cope’ or ‘not caught’ then your current arrangements would not be impacted.
However, the more likely case is that end hirers may decide it is too difficult to assess all contractors accurately, so could make a blanket assessment which assumes all contractors are inside IR35. The effect of this is that contractors would face the possibility of increased tax bills – being taxed at employed rates, despite properly operating as a business, and expecting to pay tax as a business too.
This was indeed the case when similar rules were introduced in the public sector in 2017. If the same happens in the private sector, many more contractors could find themselves severely out of pocket.
Is there anything contractors can do?
Definitely. April 2020 may seem rather distant but it’s important to look at your options as soon as possible.
Your options could include:
- To cease being a contractor and join your end hirer or agency as a regular employee, if they will make that option available.
- To continue to operate via your limited company, paying tax via your end hirer’s PAYE. This would mean you would pay more tax and therefore face reduced take-home pay, in which case you may have the option ask for a rate increase to mitigate the impact.
- Another option is to consider joining an Umbrella company. An Umbrella operates as your employer, removing the ‘risk’ of IR35 assessment from the organisation(s) providing your assignments. When you work this way, you’re considered an employee of the Umbrella company, and taxed via PAYE. The difference is that, with an Umbrella, you enjoy the flexibility of being a contractor whilst also having employment rights such as sick pay, holiday pay and access to a company pension. Find out more about the JSA Umbrella option.
When considering which option may suit you best, it’s important to get detailed pay illustrations to show all the deductions and tax payable for the different ways of working, so that you know exactly what to expect.
What can you do now?
The first thing to do is to talk to your supply chain, starting with your agency if you have one. Ask them if it’s their intention to insist that limited company contractors move to their payroll and become subject to PAYE? Or will the end hirer take responsibility for determining your IR35 status allowing you to continue to work via your limited company? It may be that they do not know at this stage, but at least you can find out when they will be able to address the issue with you.
Now that the formal consultation on off payroll in the private sector has closed, we expect to see the proposals included in the draft Finance Bill this summer, with a final announcement in the Chancellor’s Autumn Statement. We will keep you informed as the proposed off-payroll working rules become clearer.
In the meantime, if you wish to clarify any aspect or would like to discuss the changes with one of our expert contractor accountants, please do get in touch on 0800 252640.
Further reading: Off-payroll working rules from April 2020, HMRC.