Everything contractors need to know about IR35 off-payroll changes
With less than one month to go until the new IR35 off-payroll rules come into force, more than half of the UK’s self-employed contractors are still yet to undergo an IR35 assessment by their client to determine whether they are ‘Inside’ or ‘Outside’ IR35.
From April 2021, the rules for engaging freelance contractors through personal service companies are changing and it will become the responsibility of the organisation receiving an individual’s services (i.e., the ‘client’) to determine whether the off-payroll working rules.
We recently surveyed our contractor network to find out what their biggest concerns are regarding the upcoming legislation changes and have collated our findings, and the verbatim comments we received, to produce this guide to help contractors ensure they understand their rights and responsibilities in relation to the IR35 off-payroll changes, and what actions they and their clients must take to mitigate against the potential associated risks and consequences.
How will the IR35 off-payroll legislation affect contractors?
Lack of preparation for the upcoming IR35 off-payroll changes can have significant implications for both the client and contractor. If assessed as ‘Inside IR35’, contractors will need to pay the same income tax and NICs as if they were employed by the client and could potentially reduce their net income by up to 25%. Given that, it’s hardly unsurprising that 54% of our survey respondents told us that their biggest concern was getting paid less.
Lack of adequate preparation or simply misunderstanding the legislative changes could also result in unnecessary early contract terminations by clients panicking as April’s deadline begins to loom; this was the second biggest concern amongst the contractors we surveyed (28%).
Who is responsible for determining my IR35 status?
The IR35 off-payroll legislation means that, as of April 2021, it is the responsibility of your client (sometimes referred to as the 'end hirer) to determine your IR35 status which could be either:
Inside IR35: contractors deemed to be ‘Inside IR35’ are considered to operate in a way more akin to a permanent employee by the client and will therefore also be liable to tax and national insurance contributions as an employee of the client.
Outside IR35: contractors ‘Outside IR35’ are deemed to fall outside of the rules of IR35 and can continue to operate legitimately as an external contractor and continue to be paid as such by their own limited company. Such contractors operate independently from their clients and choose when, where, and how they work.
The new IR35 off-payroll changes require the client (end-hirer) to demonstrate they have taken ‘reasonable care’ to ensure an accurate status determination. However, you as a contractor also have certain legal obligations and must take steps now to safeguard yourself in preparation for the upcoming legislation changes.
It is a common misconception that having an apparently compliant set of written Terms and Conditions guarantees an ‘Outside’ IR35 determination; however, IR35 revolves around far more than the written contract alone, so working practices must also be taken into consideration. All this can seem very complex, confusing, and overwhelming to contractors and their clients alike.
IR35 off-payroll: What is ‘reasonable care’?
HMRC describes reasonable care as clients doing everything they can to make sure tax returns and other records sent to HMRC are accurate. Advising clients on ensuring they take reasonable care, HMRC recommends maintaining the correct documentation, asking for clarification on any uncertainties, and considering individual circumstances when determining an IR35 off-payroll status.
Am I at risk if my client doesn’t show reasonable care?
Contractors will face no penalties for client’s lack of reasonable care. If a client is found to have purposefully lacked reasonable care when determining a contractor's IR35 status, then they may be charged a fee or in some cases even taken to court.
A valid concern, 12% of our survey respondents were most worried about the potential risks if their client did not demonstrate reasonable concern. If you disagree and wish to challenge a client’s status determination, we can offer a quick and effective dispute resolution process that prevents disruption and ensures contract continuity, reducing the risk of unnecessary early contact terminations or a sudden, unexpected reduction in take-home pay.
What can I do to reduce the potential risks of IR35 off payroll?
We can help you. Developed in partnership with Kingsbridge Insurance, we offer a completely free solution that safeguards and supports both our contractors and their clients, giving you access to the only hybrid IR35 assessment tool on the market, designed by IR35 expert Andy Vessey, who has successfully defended over 500 cases against HMRC.
We can give you:
- A fully insured status determination informing where you fall within the IR35 scope
- An objective, custom-designed IR35 status determination process
- Expert consultancy and advice on how to effectively communicate with your client
- Peace of mind that both you and your client are fully prepared and compliant
How will the IR35 off-payroll legislation affect my contract?
IR35 off-payroll changes could potentially result in the termination of your contract. Clients may decide to cut back on contracted staff to reduce IR35 status determination responsibilities and associated risks. Our solution helps minimise these risks and reassure clients by providing fully insured individual contractor status determinations, manual reviews of borderline results, and expert advice to ensure clients are fully compliant with all IR35 off-payroll guidelines.
How will the IR35 off-payroll legislation affect my pay?
IR35 can significantly impact contractors' take-home pay, meaning contractors could end up losing money. Subject to National Insurance and tax deductions, the IR35 off-payroll legislation treats contractors' fees like a salary, ensuring that freelance contractors and permanent employees pay equal amounts in employment taxes. Through our solution, if you are deemed to be ‘Inside’ IR35, you can continue to legitimately operate through your own Limited Company as Amoria Bond will make the relevant Tax and NI deductions prior to payment.
How does a client determine my IR35 status?
Clients must take reasonable care with all status determinations, with the three main factors including:
- Control and direction: The control test seeks to determine if the contractor has autonomy in completing their work.
- Substitution: In a typical employment relationship, the employee would not be able to send in a substitute to carry out their services. Where a contractor operates outside of IR35, there should be a right of substitution clause in the contract.
- Mutuality of obligation: The test seeks to establish that there does not exist a mutual expectation of continuous work.
As a contractor, it is important to know how IR35 statuses are determined to ensure you are paying the correct amount of Tax and National Insurance. Our fully compliant solution offers unlimited role-based and individual assessments, specialist consultation, and manual reviews of borderline results to ensure clients' determinations conform with IR35 off-payroll guidelines.
How can I trust an outside determination done by a client?
Clients must demonstrate reasonable care with all status determinations, meaning that much consideration is taken with each individual IR35 decision. Penalties for incorrect payments and documents can include fines or even court action, making it in both the client and contractor’s best interest to carry out accurate IR35 determinations.
How should I speak to my client about the IR35 off-payroll legislation changes?
We understand that approaching your client can be challenging. You may be nervous to initiate a difficult conversation, worried about creating tension between yourself and your client, or even concerned about losing your contract. We can expertly advise you on how to speak to your client, and in some cases may even be able to intervene on your behalf to enable an effective discussion, speedy determination, and smooth transition.
How can I remove the risks associated with the IR35 off-payroll legislation?
IR35 off-payroll can feel complex and confusing. We can help de-mystify the upcoming legislation changes to ensure that you are fully informed and protected. A combination of regular reporting, analysis, and accurate determinations enables us to give you the most accurate and unbiased results, so that you know whether you fall inside or outside of IR35 and can plan and make well-informed decisions that support your personal circumstances and lifestyle.
How will contractors be affected if a client’s IR35 status decision gets challenged in the future and turns out to be wrong?
Contractors should not be penalized for any incorrect IR35 determinations as they do not fall within the chain of liability. If an IR35 status determination is deemed incorrect, HMRC can insist on returning tax or imposing fines towards the client or fee-payer. In some unfortunate instances, however, the client could choose to pursue the contractor for any resulting charges, in which case the contractor may feel pressured or coerced into paying outstanding fees.
We can provide insurance to prevent this scenario from happening. Our IR35 Protect Cover, underwritten by Zurich Insurance plc, protects contractors from IR35-related defence costs, taxes, interest, and penalties deemed payable by HMRC. This cover is also valid for four years past the policy expiry date, providing you with even greater peace of mind.
Who pays the tax if a client’s IR35 off-payroll status decision turns out to be wrong?
Contractors are not at fault for any incorrect determinations by clients, and so should not fear any immediate or future repercussions. If a client’s IR35 status decision is deemed to be wrong, then the client could potentially face financial and legal penalties in order to compensate for missed tax payments.
How can I prepare for the IR35 off-payroll legislation changes?
To prepare for the upcoming legislation changes, contractors must understand their rights, responsibilities, and the potential risks associated with the IR35 off-payroll legislation.
We can bring you peace of mind by helping you to:
- Keep an audit log of your due diligence (i.e., downloadable reports of contracts/reviews)
- Remain updated and informed with regular tax and legal updates
- Ensure all required assessments are up-to-date
- Expertly review each IR35 status assessment
- Provide you with access to IR35 Protect insurance and an IR35 helpline
- Stay protected through annual review and risk assessments
- Alternative solutions
Amoria Bond's sister company, Coalesce Management Consulting (CMC), can offer contractors the alternative option of a permanent salaried position. CMC can place you back onto your existing client project through a permanent employment contract within the consultancy. This means that you will qualify as a full-time employee, removing any IR35 risks whilst still enjoying the benefits of freelance contractor work.
Whatever the outcome, Amoria Bond has a solution to fully meet your needs. Take advantage of our hybrid IR35 assessment tool and expert consultancy to protect your future.
Need more IR35 advice? Speak to our IR35 expert Jenny Walsh on 0161 511 8365 to give you peace of mind today!