In just over a month’s time, changes to IR35 tax rules for contractors will occur. However, many contractors are still confused as to what the IR35 changes will mean for their business and what is required prior to the implementation date of 6th April.
From 6th April, if you work as a contractor and your contract is considered ‘inside’ IR35, for tax purposes you will be deemed as an employee. Being ‘inside’ IR35 means HMRC believes you are working on a self-employed basis when actually the service you deliver to your clients reflects that of employment. This will consequently mean you’ll be obliged to pay tax at the same rate as an employee.
Due to many contractors informing us they are uncertain what the upcoming changes mean for them, Hiscox explore the myths around IR35 to ensure you understand all there is to know:
1. IR35 changes apply to all contractors
This is untrue. In truth, the new IR35 changes only apply to contractors who provide their services through Personal Service Companies, otherwise known as Limited Companies. It won’t affect umbrella company workers, sole traders, Construction Industry Scheme contractors or direct PAYE employees. Companies who are deemed ‘small’ companies by the government’s rules are exempt from the IR35 rule changes, so if you are contracted with a small company then you shouldn’t be affected. If like many contractors, you work through a medium-large sized business or a limited company, you will possibly be affected.
2. I need to inform HMRC I am a contractor
This is also untrue in most cases. A part of the IR35 rules change is that the government is giving the company you work for the responsibility to determine whether you fall inside IR35 and therefore required to pay additional tax. With that being said, ensure you don’t entirely forget about the changes because being considered ‘inside’ IR35 could potentially mean you’ll be earning a lot less. Therefore, regarding your future income and whether or not you want to continue trading as a Limited Company, you may wish to seek professional advice from an accountant or tax adviser.
3. If I’m considered to be inside IR35, I can appeal and get it overturned
With the new rules, you will be able to challenge a decision made regarding your IR35 status, however the decision will ultimately lie with the company you are contracting for. You will have restricted influence over the final decision. If you decide to make an appeal, your client will have up to 45 days to supply their paperwork, by which time you may unfortunately be out of pocket. This is therefore another important reason to seek professional advice from an accountant. An accountant will be able to advise on your position allowing you to plan for any impending status changes.
4. My contract states I’m a genuine contractor and I have multiple contracts – so I’ll be considered outside IR35
This isn’t guaranteed. Alongside what is written in the contract, your clients will base their decision on ‘practice’ too. Regardless if your contract is explicit, if your client feels that in practice your work exhibits that of an employee and should be deemed ‘inside’ IR35 then that will be their decision. Each client contract will be considered on a case-by-case basis if you have multiple contracts.
5. I have a Statement of Work – that proves I’m supplying a service and must be a contractor
As a contractor, if you supply a genuine ‘Statement of Work’ service, which means services that exclude labour or personal services, you may well be considered as outside IR35. However, this will also be determined with regards to ‘practice’ rather than what’s written in the contract. Therefore, it is best not to assume that you are exempt due to your ‘Statement of Work’.
There is a lot of ambiguity still remaining around IR35 tax rule changes. There is also little time until the changes take effect therefore it is imperative you act now to understand how you may be affected or how the rules can potentially impact your income.
Contacting your accountant or tax adviser for sound advice is the best place to start.
For further information on IR35 and how it may affect contractors like yourself, visit the Hiscox small business blog and contact us at Stewart Accounting to find out how we can help.