From 6th April 2017, most Limited Company contractors will be deemed inside IR35. We explain what IR35 is, what you can do about it, and offer our own expert advice!
You may have read the headlines, IR35 is changing. In this short video we’ll explain what’s changing and what many contractors are doing to minimise the impacts.
But first, what is IR35?
IR35 is a tax rule which was introduced in 2000 to combat tax avoidance through what’s known as disguised employment.
Disguised employment exists where a worker, who supplies their services via an intermediary, such as a Limited Company or Umbrella company, would be employed were it not for the existence of that intermediary.
To determine this, there are three basic tests which are applied by HMRC to determine whether someone is ‘inside’ IR35, which means a disguised employee, or ‘outside’ IR35, which means that you are not considered to be employed.
The first test that is applied is control. HMRC look at the extent and degree of control that exists, supervision and also the routine that exists within your employment.
Secondly, HMRC look at something called substitution, or whether the intermediary could supply an alternative worker to complete the work that you have been contracted to provide.
And finally, HMRC will look at mutuality of obligation, or to what extent an obligation exists between the employer and employee, for example whether the employer is obliged to offer work, and whether the employee is obliged to accept that work that has been offered.
Where a contractor falls inside IR35, their entire contract income becomes subject to Income Tax and National Insurance, both of which are deducted at source.
So what’s changing?
From the 6th April, most limited company contractors who provide their services to public sector, will be deemed inside IR35. This means income from that contract will be taxed as if that contractor were employed. With the entire contract income subject to Income Tax and National Insurance. For the vast majority of contractors this will result in a significant increase in tax, and you will no longer be able to offset expenses or benefit from a reduced tax rate on income retained within your limited company.
So what can you do about it?
Well first, try out HMRC’s long awaited online employment status service, which will help determine whether your inside or outside IR35.
If inside, you should speak to your accountant as there are still some expenses which can be offset.
You can still benefit from tax free pension contributions of up to £40,000 per year, and there are a range of tax efficient investments which can reduce your tax burden, so it’s a good idea to speak to one of our wealth management team.
If outside IR35, you should speak to your agency or accountant. Even though you’re outside IR35, your agency or end client may still insist that tax is deducted at source, and you’ll need to understand the process of reclaiming that tax if that is the case.
These changes leave many unanswered mortgage and financials planning questions, so for more information, call us on 01489 555 080 or visit our website for further details, we are here to help.