The Future of IR35

The IR35 legislation was brought in to help HMRC identify tax avoidance and includes self-employment tests and criteria that affect every company who onboards a contractor or freelancer. Scott Merrick Contractor Consulting (SMCC) ensure you don’t become an accidental tax avoidance target for HMRC when the IR35 legislation changes come into effect in 2019.

What is IR35?

IR35 is an anti-tax-avoidance rule that impacts all contractors and freelancers who don’t meet HMRC’s definition of self-employment. IR35 comes into play when a freelancer or contractor provides services for company, but rather than being employed and paid directly, the individual invoices the organisation through either their own limited company or an umbrella company.

The IR35 is designed to ensure that contractors working via their limited companies deemed to be doing the same work of an employee pays broadly the same tax. An HMRC inspector will determine this by applying an employment test to each case, which is based on the actual working practices, rather than any contract.

To show that there is no employment relationship, the contractor has to prove certain relationship criteria to determine whether they are ‘inside’ or ‘outside’ IR35. These are based on the following:

• Control – does the organisation or contractor control the work?
• Substitution – can the contractor send someone else in their place?
• Mutuality of obligation – is the organisation obliged to provide work, and the contractor to accept it?

If the contractor passes the test, they are ‘outside’ IR35, and can continue to invoice then pay themselves through their own limited company. If they are deemed ‘inside’ IR35 and HMRC declares that it’s an employment relationship, then tax and National Insurance will be deducted from their earnings and the liability for any missing tax lies with them.

As an experienced specialist contractor consultancy, SMCC take care of the crucial gap in expertise and knowledge relating to the legal requirements of recruiting and paying contractors, managing all aspects of the process between contractor and client to protect both parties through screening, running checks, payments, invoicing & drafting contracts, to ensure that all legal obligations are met.

We sit down with our clients and listen to their needs before offering tailored contract and payment solutions. We want the best for our clients and our business has grown as we manage any concerns out of utilising skilled contractors. We work with in-house teams to achieve minimum disruption, streamline payments and invoicing to retain key contractors.

Potential changes to IR35

The Government has acknowledged that contractors paying less tax than employees is an unfair anomaly, which is why they are  currently in consultation about further reforms. As a result, the IR35 reforms already implemented in the public sector are likely to be extended to private sector contracts, either next year or in 2020.

Although there are no details on the table just yet, there are concerns that organisations will be wary about contracting out work, or that contractors will need to work and operate through PAYE umbrella companies. Details of the proposed changes to IR35 won’t be fleshed out until November’s Autumn Budget. In the mean time you can prepare for IR35 amendments right now:

• Consultants can take the HMRC to find whether they fall ‘inside’ or ‘outside’ IR35. The outcome of the test is not definitive, and we would encourage you to take further advice from a contractor payment specialist. To take the test click here.

• Companies can seek expert advice from consultant management and payroll specialists such as SMCC to ensure you remain compliant with IR35 and other laws and regulations.

Although there are few concrete details showing how the IR35 reform will impact the private sector, lessons from public sector IR35 reform could help your business stay one step ahead and give you time to adapt your on boarding and payroll strategy. If you are in any doubt about your next steps please contact SMCC by calling 01277 211151 or by email.

Follow Us: