IR35, CEST and your clients
The new IR35 rules for off-payroll workers in the private sector come into force in a few months time – but what will this mean to your clients, whether they are contractors or the businesses that hire them?
IR35 rules are a headache for contractors, businesses, HRMC – and probably for you as an accountant.
Essentially, they affect contractors who do not meet HMRC's definition of 'self-employment'. Contractors who fall under the IR35 rules will become liable to Schedule E taxation and National Insurance (N.I.), following deductions for expenses.
Contractor companies can work with both IR35 and non-IR35 contracts. They will only face changes on the proportion of their business that falls within the rules.
Normal Section 198 expenses may still be claimed - plus other intermediary expenses of 5% of a contractor's turnover, for pension payments, business travel, accommodation and meals when away from home.
The IR35 debate has been raging for years, and have already meant that many freelancers have deserted the public sector – where the rules are already zealously applied. Now, the off-payroll rules are going to be extended across the private sector from April 2020. This will mean that larger companies, including your clients, will fall into the regulatory framework
The IR35 rules will result in substantially increased tax and N.I. liabilities for the majority of contractors. HMRC estimates suggest only one in 10 people who should be paying tax under the current off-payroll working rules are doing so correctly. It believes that the IR35 reforms will raise an additional £3bn in tax over the next four years alone.
Whatever stance HMRC takes and however the rules are interpreted – your clients need to understand what is going on, and why they will be taking home less in future, even if the rates they charge businesses remain the same.
How the rules will work
From 6 April 2020, responsibility for deciding the employment status of a contractor who supplies their services via a personal services company (PSC) will shift from the individual to the organisation hiring them.
Many contractors are concerned that their engager will take the view that they are inside IR35 rules – or simply makes a blanket decision that all contractors are included to reduce their own tax risk. HMRC might very well be expected to use the change in reported status as reason to enquire into the contractor’s tax affairs from previous years. HMRC has said it will only apply the rules retrospectively in cases of suspected fraud or criminal behaviour, although many observers are not convinced. There could be tax liabilities from years back if HMRC choose to look for them.
Check employment status for tax (CEST)
First introduced in 2017 to help individuals and organisations decide if a worker should be treated as employed for tax purposes, the check employment status for tax (CEST) tool takes users through a serious of step-by-step questions to arrive at an indication as to whether or not an individual in inside or outside employed status.
You can find the online tool here.
HMRC has stated their tool was rigorously tested against case law and settled cases by officials and external experts. Not everyone agrees, and even the tax officers behind it recognise that a minority of employment cases are too complicated to allow the tool to work. To be fair, they offer those individuals involved detailed help and guidance, including one-to-one support from specialist advisers.
The new version of the tool should be ready soon and should be clearer, with reduced errors and allowing more detailed information to be taken into consideration – but contractors should not wait until it is released, with HMRC saying it stands by the results given by the tool now.
Where does the confusion come from?
It is all too easy for a contractor be working with clients in ways that compromise their independent status. Factors may include:
- Working solely on site for their client
- Being unable to provide an alternate through their PSC
- Having the client picks the days, hours and locations they work
- Using IT equipment provided by the client.
- Working on a sole client contract at any one time
- Having management duties over employed staff
Many contractors fear a repeat of the public sector reforms in 2017 – which, at the very least, can cut takehome pay and, in the worst cases scenario, mean large retrospective bills for tax irregularities which are seen to have occurred over several previous years.
What can you do to help?
The rules are complicated and, as an accountant, you need to have a tight grip on them. Even when CEST seems to give a clear result, there could still be grounds for appeal and debate.
The contracting industry and the flexible workforce that make it up provide a major contribution to the economy. Contractors who discover that they are being taxed like employees but who are lacking any of the services, security and benefits that employees expect in return may look to you for guidance – as will the businesses who rely on them.
Inevitably, contractors will be increasing the rates that they demand - to compensate for the tax being deducted from what they take home.
This could mean increased operating costs for clients and a need for external funding to cover them.
At Rangewell, we are experts in business finance. We help all types of business access all types of funding including tax finance and working capital lending. We can help you find solutions when IR35 creates problems for your clients.
Not only are our services free for you to call on, we make no charge to your clients.
To find out more about a working partnership with Rangewell, and how it can help you to find better answers to your clients funding needs, simply contact us. Our service is free for both accountants and their clients.