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With the government reaffirming changes to off-payroll working rules for the private sector, contractors across the UK are wondering exactly how IR35 will affect them and what to do next.

Ahead of the reforms that will now come into play in 2021, we’ve answered some FAQs to help you determine the best course of action for your Ltd company or PSC.

IR35 Frequently Asked Questions

What does IR35 mean?

Essentially, it is legislation designed to combat tax avoidance.

It has already introduced into the public sector and is due to be introduced to the private sector in April 2021.

The rules apply to private sector companies that meet two or more of these conditions.

have an annual turnover of more than £10.2 million
have a balance sheet total of more than £5.1 million
have more than 50 employees.

It comes into effect when contractors supplying their services to clients via an intermediary, such as a limited company, and allows HMRC to collect additional payment.

The private sector IR35 reforms will put the responsibility for assessing contractors’ IR35 status on the clients – as opposed to on the individual contractor.

We go more in depth here.

Am I outside or inside IR35?

Both your written contract and your day-to-day working practices must be reviewed when assessing IR35 status, as this will provide an overall view of your engagement. Generally, three key factors can determine your status regardless of whether you work in the private or public sector:

  1. The degree of supervision, direction and control that your end-client has over your day-to-day work and contract.
  2. Whether you’re required to carry out any work yourself, or send someone to do it in your place.
  3. Whether the end-client is obligated to offer you work, or you’re obligated to accept work from them.

Determining if these factors apply to your contract and working practices will decide whether you avoid being affected by IR35, or not. As is soon to be the case for the private sector, the end client is responsible for determining your status if you work in the public sector. They will inform you if you are inside or outside IR35.

Does IR35 apply to me?

Just like public sector contractors previously, if you’re a contractor working in the private sector then you’ll likely be affected come April. If you’re a contractor working through a PSC then you could be brought under IR35, into the PAYE system, and treated as an employee. Meaning you may be facing paying extra tax each year.

You may now be thinking that your PSC will no longer be required. If so, and your company is solvent, a Members’ Voluntary Liquidation (MVL) may be the best solution for you.

How will IR35 affect me / my pay?

When the IR35 reforms come into effect, private sector companies will be responsible for deciding your tax status. You could end up paying thousands more in taxes if you’ve structured your business as a personal service company (PSC) or Limited company. If you’re deemed to be inside IR35, you’ll be taxed at source (income tax and NI), which can see your net income reduced by up to 25%, with additional income tax and NICs costing thousands.

We go more in depth here.

When will the IR35 reforms be implemented?

The IR35 tax changes for the private sector have been pushed back due to COVID-19, and will now come into play in April 2021.

Can IR35 be backdated / applied retrospectively?

The Treasury and HMRC have claimed that historical cases won’t be targeted when the private sector Off-Payroll rules come into effect. However, contractors who have their IR35 status overturned by clients following the changes have been warned that these assurances provide little certainty. This leaves the door open for HMRC potentially to retrospectively examine the tax affairs of individuals deemed within the scope of the Off-Payroll rules.

Will IR35 be scrapped?

When the chancellor made a snap decision to cancel Budget 2019, speculation arose that this could mean a delay, or even a possible cancellation to April’s IR35 Off-Payroll reforms for the private sector.

However, it was confirmed, and the government still pushed the legislation through.

Is IR35 the end of contracting?

The IR35 reforms have sparked fears that hirers will cease to hire PSC contractors, and various banks have been reported to have already reached this conclusion.

However, it’s clear that contracted work has always been in high-demand, and this is unlikely to change. Tax advantages aren’t the only reason that contractors wish to provide services via their own company.

What are my options if IR35 applies to me?

If you are deemed to be inside IR35, it will mean getting taxed as an employee and likely paying a higher rate, minus any employment rights such as holiday or sick pay.

You may now be thinking that your PSC will no longer be required. If so, you should speak to your Accountant to discuss the best way to close it down.

If your company is solvent, it may be the case that a Members’ Voluntary Liquidation (MVL) is the best and most tax-efficient solution. Depending on your circumstances, you may also qualify for Entrepreneur’s Relief (ER), meaning you’ll only pay tax at the lower rate of 10%.

Clarke Bell can help you with our ‘£995 MVL’ service. We’ll guide you through every aspect of the process, taking into account your specific circumstances. Contact us today for free confidential advice.

For some contractors, the reduction in their tax-home pay will result in them having cashflow problems. In these situations, we are also able to help you – with our Creditors’ Voluntary Liquidation (CVL) service.

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