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IR35 – A Contractors Guide
The Government has decided to update the way that private sector contracting works, by changing the legislation, referred to as IR35.
When a Ltd Company/PSC contractor has working arrangements that are similar to that of an employee, income tax and national insurance must be deducted from their pay.
Currently the PSC makes an assessment on whether the contractor must pay income tax and NI (referred to as inside of IR35), or if they are exempt of paying the tax (referred to as outside of IR35).
The Government believes that a large proportion of Ltd Company/PSC contractors are not making the correct assessment. HMRC estimate that over a third of contractors should be paying tax, but are currently not.
How is assessment of a contractor’s status changing?
As of April 2021, the client who receives the services of the contractor (referred to as the end-client) will be responsible for assessing a contractors IR35 status.
In addition, the party that pays the contractor’s Ltd Company/PSC will be responsible for deducting and paying a contractors tax – usually an employment agency e.g. First Recruitment Group.
Every contractor’s assignment, must be individually assessed and clearly documented, as HMRC will be checking this carefully.
Assessment of IR35 status by the client
There are many factors that an end-client will use to assess a contractors status. Some of the main factors include:
- Control: How much control does a client have on how a contractor works e.g. how, what, where and when?
- Substitution: Can the contractor send a substitute worker to carry out the work on their behalf, or is that individual worker needed.
- Mutuality of obligation: Is the worker obliged to accept additional work offered and is the client obliged to offer this work?
Assessments must be made before each assignment begins.
If a contractor is found to be ‘inside IR35’, the client must share this status with First Recruitment Group as the fee payer, or whoever they have chosen to be their fee payer.
First Recruitment Group must then deduct income tax and national insurance contributions, changing a worker to PAYE or to an Umbrella company. This will mean that a contractor’s take-home pay is reduced. If the contractor is found to be ‘outside IR35’ they can continue to work through a Ltd Company/PSC model and not subject to paying these tax deductions.
If you currently work via a PAYE or Umbrella company, or receive payments to your Ltd Company/PSC net of income tax and national insurance, these changes will not affect your pay.
The client making the IR35 assessment must demonstrate they have taken reasonable care when making their assessment, and also implement a clear disagreement process for decisions to be challenged.
What are First Recruitment Group doing to help?
Over the coming months we are working closely with our clients to ensure they are properly prepared for IR35 changes, making sure they produce a clear assessment process, and that they have a plan to communicate any changes with contractors in good time ahead of April 2020, to help our contractors prepare.
We have also worked closely with industry body APSCo, and other agencies, to ensure we lobby HMRC to help influence how these new changes will be implemented. Our aim is to ensure the Government gives clear information and guidance to both contractors and businesses to help the private sector prepare.
We have already seen similar changes happen in the public sector and have helped our contractors and clients deal with these changes.
Our aim is to keep our contractors and clients well-informed so we can all better understand and prepare for the changes ahead.
