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As you are probably aware, changes to IR35 tax legislation were due to roll out in April 2020. This has now been postponed until April 2021. We’ve compiled a list of the top IR35 FAQs to outline everything you need to know about the reform. This list will be updated from time to time. If you have any questions, get in touch with the team via IR35@welovesalt.com.
IR35 is the name given to tax legislation in the Income Tax (Earnings and Pensions) Act 2003. It was originally introduced in 2000 to deal with alleged tax avoidance via the use of Personal Service Companies (PSC’s). It is intended to ensure that contractors who work like employees pay broadly the same employment taxes as actual employees, regardless of the structure under which they provide their services. Currently, if you work through your PSC you need to declare whether you work inside (taxed as employed) or outside IR35 (taxed as self-employed).
The new IR35 tax legislation is expected to come into force on April 6 2020. The draft legislation was released back in July 2019 and is currently pending approval by the UK Government. We expect the final legislation to be confirmed in the first quarter of this year.
HMRC has indicated that the changes are being introduced to improve fairness in the tax system by ensuring that where individuals are working for a company via an intermediary (through their PSC) they should not able to ‘sidestep employment taxes’ or National Insurance Contributions (NICs) by working through a PSC.
Subject to Parliamentary approval and Royal Assent, the new rules will come into force on 6th April 2020 and will apply to payments made for services provided by your PSC on or after 6th April.
Following the 2017 changes in the Public Sector, the liability for making the IR35 determination shifts from the contractor to the end-user (also known as end-client). The end-client needs to provide the status determination (inside or outside IR35) to both the contractor and Salt.
If the end-client determines the assignment is outside IR35, then Salt will pay your PSC the agreed pay rate without making PAYE deductions as for tax reasons you are classed as ‘self- employed’.
If the end-client determines that you are inside IR35 then you are classed as ‘employed’ for tax purposes. You will then have to work through one of Salt’s approved umbrella companies. The umbrella company will need to make a ‘deemed employment payment’ and therefore deduct PAYE from your pay rate. This includes responsibility for levying income tax and accounting for (employer’s) NIC’s. The umbrella company may also charge a fee for using their services. All these deductions will impact your take-home pay.
You may decide to continue working through your PSC as you may also be working on assignments that are outside IR35. However, you need to discuss with your umbrella company if they are willing to pay your PSC rather than payrolling you as an individual. Salt, however, is not in a position to pay you or your PSC if the assignment is classified as inside IR35.
Many end-clients will use the CEST tool that was designed by HMRC. However, there are other tools on the market which help clients to determine whether an assignment is inside or outside IR35. In any case, the end-client needs to exercise reasonable care when making the status determination. This means that the end-client needs to explain why they are of the view that your assignment is inside or outside IR35.
Below are a few questions which will need to be considered:
•Are you under the supervision and control of the client?
• Are you able to provide a substitute?
• Is there a mutuality of obligation and do you incur financial risk?
• Are you part and parcel of the end-client’s organisation?
This list of considerations is not comprehensive and other factors may be considered including but not limited to the use of your equipment, absence procedures, contractual termination rights or the continuity of your assignment. Learn more in this blog post.
You can challenge the end-client’s status determination and they will have to respond to a request for a status determination within 45 days. The end-client can either justify their decision or give a new status determination thereby setting aside their previous determination. However, there is no appeal process if the end-client decides to stick to their determination.
The new rules will not apply if the end-client can be classified as a small business. A small business will not need to determine the status of the contractor as this would remain with your PSC. For the definition of ‘small business’, the Government intends to use the definition which is outlined in section 382 of the Companies Act 2006. A company qualifies as small if two of the following conditions apply: The turnover will be no more than £10.2 million, the balance sheet total does not exceed £5.1 million and the number of employees is lower than 50.
These changes only apply to contractors who work via their PSC. The new rules do not target contractors who are employed by an umbrella company.
If your assignment is expected to be extended post 6 April 2020, you need to ask the end-client to make a status determination as soon as possible but no later than by the end of February 2020. If you need support, please let us know.
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