Under the current IR35 rules in the private sector, it’s the responsibility of individual contractors to determine their own IR35 status for each assignment and to re-examine their IR35 status if that assignment changes.
If the correct rules are not followed and HMRC makes a successful challenge, you as the contractor will be liable for any unpaid tax and penalties.
If the Government goes ahead with the planned reforms to off-payroll (IR35) next April, then the situation will change, and your end hirer will become responsible for determining your IR35 status.
We anticipate that some contractors will find that their status gets changed from ‘outside’ to ‘inside’ as end hirers may make a different interpretation of the IR35 criteria as it applies to a particular assignment, therefore removing the liability risk by deducting tax and National Insurance before passing the net payment onto your PSC.
Others may decide it is too difficult or risky to continue using PSCs.
You may already be aware of how your end hirer plans to respond to the off-payroll reforms but if you do not then it’s important to start the conversation as soon as you can so that you can look at your options.
With advance warning, you can decide if you are going to accept your end hirer’s status determination or challenge it through appeal. If you challenge the status determination, you will need to put your reasons in writing and your end hirer will need to respond within 28 days.
In the meantime, you should take advice from our team of specialist contractor accountants as there are a number of steps you may need to take to mitigate the impact of being deemed ‘inside’ IR35.
For example, you will need to ensure you do not overpay your own salary from your PSC as this may attract higher rate tax if your end hirer does indeed decide to pay your PSC only after deducting tax and National Insurance contributions at source.
You will need to look at the consequences of being unable to claim tax relief on expenses if your end hirer changes your status from outside to inside IR35.
Site-based worker expenses are restricted if deemed caught, but business administration expenses are still allowable. It is unlikely there will be any profits to offset this against, so a loss will be incurred which can be carried back for one year or indefinitely carried forward.
Contractors who are going to be strongly adversely affected by an ‘inside’ IR35 status determination may be able to mitigate the impact by negotiating a higher rate for their assignments. In this case, it’s a good idea to speak to us to find out what the uplift would need to be so that you are not worse off under the new rules.
To find out more about the reforms to off-payroll in the private sector and how you can prepare, please get in touch with our team on 01923 257 257.