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IR35 to change contracting in the private sector

The tax avoidance rules known as IR35 have been in force since April 2000. They are designed to prevent employers and workers from reducing their tax and NIC bills by placing a company structure between the worker and the employer. 

IR35 reforms are to be extended to the private sector. Contractors could face a higher tax bill from April 2020 when reforms to IR35 legislation are set to take effect in the private sector.  IR35 rules were reformed in the public sector in 2017, with the aim of stopping work HMRC regards as ‘disguised employment’. 

Those who are considered an employee under IR35 will have to pay income tax, as well as national insurance at the higher 12% rate. The problem in this scenario is that there are tax contribution differences between someone operating via their own business, or someone being fully taxed by the PAYE system. 

The recent Eamonn Holmes furore is an example of just this – his freelance status meant his limited company has paid 19% corporation tax, not the 45% income tax he would have been liable for had he been a full-time employee. 

We do not know the ins and outs of exactly how these services were provided – he may very well be a genuine freelancer, but it is this kind of uncertainty that has led the government to estimate that contractors wrongly assessing their tax status could end up costing the economy £1.2 billion by 2021/22.

Unfortunately, it is difficult for HMRC to tell whether a small company has been inserted as an artificial step, or whether it is a genuine service business. 

If you operate through your own personal service company, you may need to prove to HMRC that your company is a genuine independent business and that you are not a ‘disguised employee’ of your customer.

Here are some ways to show you are independent and that you are not caught by the IR35 rules:

  • Work for several different customers, preferably concurrently, but certainly over a year 
  • Agree with your customer that you will provide a substitute if you can’t perform the contract personally 
  • Provide most or all of your own equipment 
  • Correct any faults in your work in your own time and at your own cost 
  • Work under your own direction as much as possible 
  • Do not accept benefits which your customer normally provides to its employees 
  • Do not attend social or training events hosted by your customer for its employees 
  • Do not become part of the structure of your customer’s business 
  • Do not become economically dependent on one customer 

If you are concerned about your employment status or IR35 get in touch with Desirie Lea or Colin Fowler on 0151 348 8400.