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Prepare yourself for the off-payroll (IR35) changes

Back in April, the government postponed the changes to the off-payroll working rules (IR35) from April 2020 to 6 April 2021 due to the economic impact of the COVID-19 crisis.

These rules are to ensure that people working in the same capacity as employees, but through their own limited company, pay the same tax and National Insurance Contributions (NICs) as people who are directly employed.

The below will explain how these rule changes will affect both business owners and those working for them.

HMRC to focus on compliance with new rules

HRMC will not be opening any new compliance enquiries into a contractor's return for tax if:

  • A client decides that a contract is within the off-payroll working rules
  • A contractor changes the way they work from providing and invoicing services through an intermediary entity to now being paid via a client or end user’s payroll
  • A contractor ends a contract because of a disagreement with the client on the status

The only instance in HRMC opening an inquiry using information from the new rules is if they suspect that fraud or other criminal behaviour has taken place. This mirrors the position they took on the rules changes in 2017.

Changes to the way you pay tax

If you are contracting for a medium or large-sized non-public sector organisation, from the moment that the rules come into effect, the client will be responsible for deciding your employment status. You should be provided with a ‘Status Determination Statement’ if the rules apply to you.

If the client decides that your contract is inside the off-payroll working rules and you are an employee. Your client or agency will be responsible for deducting Income Tax and NICs before they pay you.

You will still be required to submit a tax return. However, you will get relief on the tax which has already been paid. For the tax year 2020-2021 your limited company or another intermediary will be responsible for paying the relevant Income Tax and NICs.

If you contract for a public authority, then your client will remain responsible for deciding your employment status for tax. However, they will now need to provide you with a ‘Status Determination Statement’. The statement will explain their decision about whether the off-payroll working rules are applicable.

If you contract for a small non-public sector organisation then your limited company or another intermediary will remain responsible for deciding if your contract is within the off-payroll working rules. They will also be responsible for paying the appropriate Income Tax and NICs.

If you are not sure about the size of your client’s organisation, you have the right to request that information.

Clients must look at each individual contractor’s status

Clients will be expected to take ‘reasonable care’ when deciding whether the new rules apply to their contractors. The rules can be broadly applied to groups of off-payroll workers if they are in the same role. However, care should be taken not to rule all contractor engagements to be inside or outside of the rules.

Businesses will decide the best way to engage contractors if they are working like employees. Some organisations may decide to move their contractors onto an employment contract. While others might engage them through an agency. The option to engage contractors through their limited companies will also remain a possibility.

How to dispute a IR35 decision

If a contractor disagrees with the decision made by their client on their employment tax status, they can raise a concern through the client’s disagreement process. This will be required from April 2021.

If a contractor suspects that they have overpaid Tax or NICs then they can still follow the existing routine Self-Assessment and National Insurance.

Can you continue to work through a limited company?

You will still be able to work for a limited company after the new rules are introduced. However, the way that Income Tax and NICs are calculated may change for some contractors. The way that clients choose to engage you may also change.

Can you avoid paying tax?

It is inadvisable to engage with any tax-avoidance schemes, especially those who claim to make sure you will not be affected by the off-payroll working rules. If something looks too good to be true, it probably is, and it may be illegal.

Are all contractors self-employed?

It is no longer up to you to decide your employment status. This will be dependent on the terms and conditions of each individual engagement and your actual working practices. It is not dependent on whether you supply your services through your own limited company.

If you are working in the same capacity as an employee, you will fall under the new rules. If you are self-employed, then the rules do not affect you.

What if I am self-employed?

If you operate your own business structure and do not work in the same way as an employee, then you will not be affected by this rule. This could include you if you operate your own business structure, have your own business premises, employ other workers, or work for a wide range of clients.

For more information, please see the government website.

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