New IR35 off-payroll working rules apply in the private sector from today

The reform of the IR35 legislation for the private sector takes effect today – April 6th 2021, but how the reforms will affect you will depend on a number of considerations, writes Meredith McCammond, technical officer at the LITRG.

What are the new IR35 reforms of April 6th?

In brief, from today, if a person is working through their own limited company for a medium or large size business in the private sector, then they are no longer in charge of determining if IR35 applies. The IR35 determination now falls to the private sector body.

What is the aim of the April 2021 off-payroll working rules?

The point of the new IR35 off-payroll working rules is to ensure that individuals who effectively work as employees -- those ‘inside IR35’ -- are taxed as employees, even if they choose to structure their work through a limited company (or, as HMRC says, a Personal Service Company).

Under IR35, if you are ‘inside IR35’ then the limited company (or PSC) is supposed to tell HMRC and potentially pay them some extra tax. These rules have historically not been complied with.

Under the new IR35 rules in force from today, the end-client makes the decision instead (with ramifications if they get things wrong). This makes it much more likely that the rules will be applied properly.

What does IR35 reform mean for me?

The reform is expected to affect how much tax hundreds of thousands of people pay - different people will react differently to this depending on their circumstances and outlook. There are a number of possibilities, which include:

If you will continue to work through your own limited company, and:

• If you provide your services to ‘small’ clients in the private sector whether inside or outside IR35, the old IR35 rules still apply. But be aware, these rules introduced in 2000 do not just fall away altogether post-April 6th 2021! 

• If you fall within the new rules but are ‘outside IR35’ then it’s business as usual – your limited company can continue to be paid gross.

• If you are inside IR35, whoever is responsible in the supply chain for paying your limited company will have to deduct tax (probably at basic rate) and employee NIC from your gross invoice amount and pay them to HMRC, and also pay employer NIC and the Apprenticeship Levy.

Your limited company does not need to deduct tax/NIC again when it pays you. There is likely to be a hit to your pocket, however, because the income has had tax and NI applied at source.

You may also have had to renegotiate your contract rate to take into account the fact that there are more costs (that is, employer NIC and the Apprenticeship Levy) elsewhere in the supply chain.

Can I challenge my IR35 status under the new off-payroll working rules?

If you are inside IR35 but don’t agree with the end-client’s decision issued in the Status Determination Statement, you can find guidance on what to do in HMRC’s technical guidance. In short, you will need to go through a Status Disagreement Process (set up by your client), although there is no obligation on the client to alter their original decision about your IR35 status.

Are there alternatives to a limited company if I want to keep on my current project?

If you decide to shift away from working through your own limited company:

• You may wish to try and get taken on directly by the end-client as an employee.

• You may wish to carry on working ‘flexibly’, but instead of via your own limited company and because of IR35 reform, via an umbrella company instead (given the administrative considerations of running a limited company may well now outweigh the benefits).

As we have shown in our recent report, umbrella employment can be a positive choice for many contractors, but there can be complexities to be aware of. In particular, you should be extremely wary about becoming entangled in disguised remuneration arrangements.

In addition, if there is an agency involved, you should make sure that they hand the correct amount of money over to the umbrella. 

Example: Ben’s technology recruitment agency finds him an assignment for £175 a day (gross). On top of this, there are employment costs for the agency of about £55, meaning that the amount the end-client pays the agency is £230, plus its margin. If the agency pays only the £175 to Ben’s umbrella company, then Ben is going to be very disappointed when he gets his first payslip, as he will see that all the umbrella’s employment costs have come out of the £175. Ben needs to make sure that the agency pays the umbrella the £230 they received from the end client.

• Of course, you may wish to take the opportunity to give it all up altogether and to run a B&B or become a cheese-maker! Some contractors initially opted for such early retirement when the forerunner to today’s new IR35 rules were introduced in the public sector in April 2017 (and those public sector rules remain in force).

What if I will change the status of my limited company because of the IR35 changes?

In this latter situation (or indeed, in either of the two situations above), you may want to make your limited company dormant, or apply to have it struck off.  There is guidance available from HMRC.

But if you opt to make your company dormant, you will still need to keep returns and accounts up-to-date each year. If you want to close it down, please be aware that HMRC could object to the striking off if there are outstanding corporation tax, VAT or PAYE issues.  Either way, if you don’t meet your trading obligations fully, you could easily find yourself with messy compliance issues and risk enforcement action/penalties from HMRC. So if IR35 reform leads you down this path, professional advice and assistance may ultimately be needed.