Written by My Digital Accounts
As you will no doubt be aware, unless you have been living under a rock, the UK government is extending the updated IR35 rules to the private sector having introduced them to the public sector in 2017, clamping down on what HMRC sees as aggressive tax avoidance. Making Tax Digital and other HMRC initiatives were meant to simplify tax but these changes make things much more complex with potentially grave consequences.
The major change in the new IR35 rules is to move tax liabilities from limited companies, used by some 20 per cent of the five million contractors and freelancers in the UK, up the supply chain to the ‘fee-payer’. Feepayers are the entities who pay limited companies directly and could be end-clients, recruitment agencies or other intermediaries who will now become responsible for deducting tax (where appropriate) before making payments to one-person limited companies (OPCs).
The rules only apply where the end-client is a medium/large business. A medium/large business is one which meets two of the following 3 tests:
- Turnover exceeding £10.2 million;
- Over 50 employees;
- The company’s net assets exceed £5.1m.
The rules continue to apply to ALL public sector assignments irrespective of the size of the government department.
Under the new off-payroll rules, more ‘disguised employees’ will be inside IR35 paying increased tax and National Insurance. HM Treasury estimates this will yield £3 billion over the next four years.
Some major companies who depend on contractors have declared “blanket bans” on working directly with limited companies and now favour umbrella companies because they are perceived as the ‘easiest route to compliance’, allowing them to work with one supplier rather than thousands of PSCs.
The impending IR35 changes will leave fee payers liable for unpaid tax if HMRC deems a contractor to be on the wrong side of IR35 after receiving payments gross. End-clients and fee-payers need to demonstrate ‘reasonable care’ when assessing contractors’ IR35 status although no fixed legal definition of ‘reasonable care’ leaves it open to interpretation. Some ultra conservative end-clients/agencies (or those with compliance departments who exert disproportionate power in a business) have simply banned the use of OPCs in their supply chain.
Some other decision makers view ALL contractors as inside IR35, taking a conservative, risk-averse approach. Others conduct individual contractor IR35 assessments. Either could result in errors with apocalyptic consequences.
Get it wrong by being too liberal and fee-payers will have to pick up the bill. Get it wrong by being too conservative and they could lose market share.