In the changing business landscape over the last year it has sometimes been hard to remember when regulations are being introduced or changed. However, one big change that is coming in the next few months is the alteration to the IR35 rules which will come into force on 6 April 2021 (postponed from April 2020).
The existing IR35 rules have been in place for many years and are an attempt to tackle sham self-employments where the contractor has formed a company to avoid being classed as an employee of a customer. The benefits to both the contractor and the customer are significant tax and especially National Insurance savings. The long standing IR35 rules seek to remove this tax advantage by levying additional tax charges for the contractor. The table below shows an example of the tax consequences.
|Income Tax/ Corporation Tax
|Total Tax and NIC
As you can see from the table above, the total Tax and National Insurance for an IR35 company is similar to the sum due if the individual was employed. However, because they are also responsible for the employer’s National Insurance, the individual contractor is left with a much reduced net earnings figure.
Under the current IR35 rules, it is the individual’s responsibility to determine whether or not the IR35 rules apply. However, HMRC believe that 90% of the people who should be applying the rules are not doing so. As a result, the rules have been amended to push the responsibility of establishing if the IR35 rules apply to the client. If the client believes that the rules are applicable, they need to deduct Income Tax and National Insurance before paying the contractor. If the client fails to do so, they will be liable for interest and penalties on any underpaid amounts.
When this change was enacted for public sector bodies in April 2017, many of them decided to apply a blanket rule and treat any contractor with a company as being within the IR35 rules. This led to an additional £550million in tax for HMRC in the first year of operation but also resulted in a lot of contractors leaving the public sector creating a shortage of workers and an increase in contractor rates.
Our advice for any business that uses sub-contractors is:
- Don’t leave it too late, there are now only 3 months until these rules come into force. Now is the time to act and review whether you have any exposure to the changes.
- Don’t just apply a blanket rule to all subcontractors who use companies. This is going to significantly reduce the take-home pay of many and could lead to a shortage of workers or higher rates.
- Review your contracts with sub-contractors. If possible, consider whether they should be amended so that they do not fall within the IR35 rules. The tax savings for the sub-contractor are significant.
- Take professional tax and legal advice. The penalties for not applying these rules correctly can be substantial and could pose a big risk to your business.
HMRC are looking to raise an additional £1.3billion in tax per year by changing the rules in this way, so this is the last chance for businesses to get themselves ready for the changes.
Update 16 February 2021: the government has announced that it will take a ‘light touch’ approach to penalties.
HMRC have stated that “customers will not have to pay penalties for inaccuracies in the first 12 months relating to the off-payroll working rules, regardless of when the inaccuracies are identified, unless there’s evidence of deliberate non-compliance. This commitment has not changed.”
They have also made a commitment not to use information acquired as a result of the changes to the off-payroll working rules to open a new compliance enquiry into returns for tax years before 2021 to 2022, unless there is reason to suspect fraud or criminal behaviour.