IR35: Dos and don’ts to consider for 2021
IR35: a recap
With everything else that’s been going on the information regarding IR35 may have got a little lost lately, so we thought we’d write a no-nonsense article to keep you up to date. To recap, IR35 was introduced to ensure contractors did not contract through what HM Revenue and Customs define as ‘disguised employment’. From April 2021 the end client, rather than the individual, will determine whether a contract is inside or outside IR35 before starting.
Now we will look at the do’s and don’ts of IR35 for 2021 as told by Integro Accounting.
IR35 status: the basics
First thing's first, how will you know if your contract is inside or outside IR35? If the answer is yes to any of the below three clauses, we recommend you speak to an expert advisor as you could potentially be considered inside IR35. There are obviously the rare exceptions within different sectors but these clauses provide a good initial indication.
Does the fee payer want you and only you to complete the work i.e. they won’t accept a substitute from your company? Is the fee payer always required to provide your company with work? Are you under direct supervision from the end client?
If your business is inside IR35 many people immediately switch to an umbrella solution. But you should take advice from an expert as this may not be the best thing to do for your business.
If you contract outside IR35 through your own limited company, this is the most tax efficient way of contracting. You can usually command higher rates of pay (as a limited company you don’t receive the same perks and benefits as an employee) and payments can be made through a combination of dividends and salary, saving on tax. You can claim on a large range of company expenses and take full advantage of the flat rate VAT scheme.
If you contract inside IR35 you are considered, for tax purposes, an employee of the end client and therefore subject to PAYE. However, there are several benefits that shouldn’t be overlooked. Your company can remain dormant allowing you to contract inside and outside IR35 depending on your contract, and you can take full advantage of the flat rate VAT scheme. You can claim on several basic company expenses and have complete flexibility should you have multiple contracts.
IR35: things to start doing now
It’s been recommended that you allow yourself at least six months to prepare for the delayed changes, in other words, if you haven’t already, there are a number of things that we recommend you start doing for your business.
Firstly, make sure you have the correct business insurance. By doing so you’re demonstrating that you have taken the steps to protect yourself and your company when taking on contractual risks and liabilities. This alone differentiates you from ‘an employee’.
Secondly, consider a verbal or written review of your IR35 status. Covid has meant delays and changes that couldn’t have been predicted so it’s worth sitting down and assessing where you are, what works best for you and finding out more about tax implications. Likewise, always check your clauses with an expert just to make absolutely sure everything is clear.
You may be wondering why the onus is on the individual when the responsibility for determination now lies with the recruiter/end client. Although ultimately the contract will be decided by the fee payer, a contract will be HMRC’s first starting point for all enquires. Having a contract reviewed will ensure that it fully represents how a contractor provides their services and in the event of an enquiry neither the working practices nor the contractual terms are contradicted by the other (limiting HMRC’s ability to question which is correct).
Thirdly, consider taking out cover for your IR35 outcome. This is effectively insurance in case your status is ever challenged by HMRC if they consider you to be within IR35 (when you work outside it) and will cover the costs of professional representation.
Finally, if your hand is forced into working via an umbrella company, it’s important that you do understand the difference between Umbrella and Payroll (PAYE) so take your time doing the research to see which is the best fit for you. The difference is with PAYE your agency runs your payroll, with an Umbrella company they’ll run the payroll and you may be able to claim tax relief on some work-related expenses and receive employment rights and benefits. Speak to your recruiter or end client and find out what their plans are to make sure they align with yours.
IR35: things you shouldn’t do before 2021
Don’t assume the decision maker has everything in hand. With all the changes that have taken place (and are still to come) make sure the proper consideration has been given to whether your contract could be inside or outside and they are clear to you on their plan so you don’t have any surprises. This will ensure you have ample time to consider your options.
Don’t rely solely on online tools. HMRC have introduced CEST (Check Employment Status for Tax), an online tool which is useful, however, they have said that if IR35 status is challenged, the CEST tool provides no support. That makes it even more important to have written reviews and protection against your business status.
Don’t make any hasty decisions and close your company. If you’re genuinely working outside IR35 there is nothing stopping you from continuing to do so. Some end clients have been penalised for something called ‘blanket assessments’ where they will automatically not allow contracts outside IR35 as part of their staff. They do this purely due to the uncertainty that IR35 has brought with it throughout the year. Many companies are attending seminars on the matter and may change policies moving forward. Ultimately there really is no reason you can’t work outside IR35.
More on IR35 and freelancer tax advice.