The IR35 is the UK’s anti-tax avoidance legislation and it’s designed to tax workers getting paid through an intermediary i.e. a limited company at the same rate as employees. The IR35 has been criticized by experts due to its failings such as limited companies have to pay employers and employees NI contributions and this action alone results in higher taxes paid by those in the IR35 than employees.
April 2020 changes to off-payroll working are going to have a huge impact on the way contractors are assessed and taxed. The IR35 rules test the weakest link. Whether you are a large company using contingent labour, a recruitment agency or even just a contractor working within a limited company entity it is imperative that you and your accountant are up to date with rule changes.
With the existing IR35 taxation rules all contractors are responsible for determining their employment status. If a contractor has a limited company, it would be this limited company that was liable for paying national insurance and tax liabilities if HMRC found you to be working outside of the IR35 regulations.
IR35 April 2020
From 6 April 2020 the IR35 puts the onus on the limited company to assess it’s contractors tax status and it can be found in breach of the IR35 rules. Within the new rules the contractor will not bear the tax risk, this will be passed to the business or party above the contractor in the supply chain. This could be a recruitment agency or if there are many contractors working for the same limited company it’s the company that’s liable for any breach of their contractors’ tax status.
Why The IR35 Update?
These rule changes have been brought into law to catch out employees that are working as contractors to create a tax break. There is no doubt it’s going to be disruptive and costly to businesses with freelancers or contractors on their books.
While 6 April 2020 is the date these new rules are law and applies from that date onwards, there is a major worry among business owners large and small that HMRC may take retrospective action on contracts running prior to this date, which could cause huge financial burdens for business owners.
How to prepare for IR35
Arguably, there has been more than adequate warning of the rule changes so all parties should be ready for April 2020.
The UK government has released documents into the public domain to help businesses and contract workers understand the rule changes and ask questions While the IR35 is not considered ‘fair’ by accounting experts, it’s by in large understood.
It’s the unknown that’s of most concern to businesses with contractors on their books working through their limited companies.
Are they going to get a large tax bill for financial periods prior to April 2020? The uncertainty has led to many contract workers losing their contracts and a reduction in the number of contractors being hired whilst these changes are brought into action.
If you’re still in doubt of the implications on your tax status as a contractor engage a chartered accountant to get you set up for next year. You’d be hard pushed to find an accountant ignorant of the changes to the IR35 and within the accounting and tax fraternity, many specialist accountants have been blogging about the subject for some time now.
In 2018 a petition to the IR35 rule changes was present on the HMRC website. An article about the proposed changes was cited on the petition, which was then signed by over 30,000 people.
Ignorance is not bliss when it comes to tax obligations. Understand how your business will operate successfully in 2020 irrespective of the IR35 rule changes.