The government have announced a delay to IR35 in light of the Coronavirus outbreak. The legislation is now planned to go ahead on 06 April 2021, giving businesses and contractor more time to prepare. Understandably there are a lot of questions that need answering, set against an uncertain backdrop which is changing regularly.
What is IR35?
IR35 often referred to as The Intermediaries Legislation has been in force since 2000. It was created to take away the tax advantages of individuals providing services through a limited company who are not strictly in business of their own account. In other words, the rule is aimed against so called ‘disguised employees’ – people who are providing a service to one client and whose working practices mirror those of a traditional employee.
The government clamped down on ‘off-payroll working’ in the public sector in April 2017. Public sector clients became responsible for working out whether their workers were caught by IR35. Any workers subject to IR35 would have to have PAYE tax and NICs deducted at source. To help employers and workers decide if IR35 might catch them, the government introduced an Employment Status Test to mixed reviews.
Moving from PSC to Umbrella? Here’s what you need to know.
Contracts outside IR35
You’ll to work with your client to prove that the contract is genuinely outside of IR35. You can use HMRCs CEST (Check Employment Status for Tax) tool to assess each contract, or you may look at an independent tax status test such as that offered by IR35 Shield. Either way, your client needs to provide a Status Determination Statement for each and every assignment you complete.
Contracts inside IR35
For many PSC contractors, accepting contracts for inside IR35 work will be the simplest of options. You’ll become an employee and get access to the same benefits. Often this will mean being paid through a third party umbrella company or similar and having tax and NICs deducted at source. Where your limited company has been active in that financial year, you’d still need to complete a tax return, showing employed income for any contracts inside IR35.
What is a Personal Service Company (PSC)?
A Personal Service Company, often referred to as a PSC is a popular form of limited company. Usually set up by contractors, consultants and other types of self-employed workers to carry out work for their client(s). To be concise, a PSC sells the work of an individual and is owned and operated by that individual as a limited company.
The term PSC was originally used by HMRC in relation to the introduction of the IR35 legislation back in 2000.
When does IR35 apply?
IR35 applies when the following three conditions are met:
- An individual performs services for another (the client).
- These services are provided under a contract that involves a PSC.
- If the services were provided under a contract directly between the individual and the client, rather than through a PSC, the individual would be regarded as an employee of the client.
Points 1 and 2 are pretty easy to determine. It’s point 3 that can be interpreted differently when using previous case law.
The three tests for employment status taken from previous case law are: the Right of Substitution, Control and Mutuality of Obligations.
See also: The three tests of employment status
What are my options if a contract is inside IR35?
Firstly, if you believe the contract has been wrongly deemed inside IR35 speak to your client. You’ll need to discuss their expectations and the contract you have in place to ensure this is reflected in the way you work with them. If there is no change to their decision, you can appeal and your client has 45 days to respond.
Failing this, you have a number of options for getting paid. However, you’ll need to check with your agency or end client that they can support the different payment models.
1. Continue being paid through your PSC
It is possible to continue to be paid through your PSC. Do check with your client or agency to see if they can support this. It’ll just mean that your fee-payer will treat your full contracted income as if it were a gross salary. Income tax and National Insurance will be deducted before the net amount or ‘deemed salary payment’ is made to your PSC.
Probably the most well-known option is to engage with a payroll provider and be paid through the umbrella model. You’ll become an employee of the umbrella company, deemed as employed and have access to employment rights such as holiday provision, pension and statutory payments.
Most umbrella companies charge a ‘margin’ or administration fee to process payroll and you’ll also see employer deductions. All PAYE tax and NICs are deducted at source and you are paid the remainder after all deductions.
People Umbrella offers one of the most competitive margins available and also gives you access to a great range of benefits to help make your pay go further.
It may be the case that the end client or agency are able to put you on their PAYE payroll. You’ll become their employee and have full employment rights, holiday pay etc. This is likely to mean that your headline rate of pay is lower than umbrella, but there’ll be less deductions on your payslip. Ultimately the take home pay is likely to be the same as umbrella, but your payslip will be much simpler.
People PAYE is a good option if your agency or end client support outsourced PAYE payroll. Again, simple payslips, full employment rights with access to holiday provision, pension and statutory payments. You’ll also get access to the full range of additional benefits that we offer to our contractors. People PAYE can also help agencies to improve cash flow and increase efficiencies.
4. Work with ‘small’ businesses
Small businesses will be exempt from the new IR35 rules if they meet two of the small business criteria. If you only accept contracts through this type of client, you’ll retain responsibility for assessing your own IR35 status.