At Aardvark, we’re constantly advising our clients on how to handle IR35; from ways to challenge a client status determination, to how best to continue trading ‘inside’, we’re here to offer specialist advice and support.
This guide pulls together our best advice on all things IR35, with practical steps that you can take for the best chance of a positive outcome.
Quick recap – what is IR35?
Ir35 (actually the name of the press release that launched it – Inland Revenue 35) is tax legislation that aims to ensure that self-employed people pay the right tax. As a contractor, each of your contracts will be either ‘inside’ or ‘outside’ IR35 according to the application of a set of rules. If your contract is ‘outside’ the legislation, you can take advantage of certain tax efficiencies through the use of a Limited Company. That’s why many contractors will only work on contracts that are outside IR35.
What’s all the fuss about?
From 6 April 2021, IR35 in the private sector changed. The factors determining if you are inside or outside of IR35 didn’t change, only the ‘new legislation’ changes who determines the IR35 status. Prior to April 2021, you as the contractor determine your own IR35 status. From April 2021, the decision of whether each engagement is within IR35 now falls on the end client, with the client also picking up the tax risk should they be found to be wrong. This isn’t entirely new, as this already came into effect in the public sector from 6th April 2017. In fact, it’s the experiences of that change that are causing the concern right now…
When the same change came into force in the Public Sector in 2017, we saw a wide range of risk-averse clients blanket banning Limited Company contractors and forcing them to decide whether to contract through an umbrella company (and be out of pocket as a result) or go elsewhere. It didn’t take long for clients to relax their approach as big projects ground to a halt, and the Private Sector soon learnt from some of these mistakes. However, we are seeing a number of big Private Sector clients, including HSBC making it clear that they do have plans to reduce their use of contractors. On the other hand RBS have said the opposite in which they will work alongside contractors to help them point outside of IR35, if this is reflected in their working conditions.
Who is affected?
These new rules will only apply if you are a contractor working with a medium or large end client. If you are working for a small end client, then it will be ‘business as usual’ as the rules are not changing. A small company is based on if two of the following can be satisfied:
a. Turnover of no more than £10.2 million
b. Balance sheet total of no more than £5.1 million
c. No more than 50 employees
How will my client make a status determination?
In order to determine your status, the end client must produce a ‘Status Determination Sheet’. This should be a written statement that confirms the end clients’ decision on your IR35 status, along with their process on how they have come to this conclusion. One problem that was identified when this came in for the public sector, is that some organisations such as TFL and the NHS were not looking at contractors individually and had determined them all with the same status (referred to as a blanket approach in the consultation). The draft legislation however, has made it clear that end clients are to take reasonable care to make sure each contractor is reviewed based on their individual working conditions.
The end client must then pass the determination on to all parties involved; as the contractor you will get a copy of this.
What should I do if I disagree with my client’s status determination?
If you disagree with the determination, the appeal process needs to be done directly with the end client. There is no further guidance yet on a formal process for this, however the end client will have 45 days to respond to your appeal. If there are other third parties such as agencies who pay your invoices they too will be made aware of the determination so they can apply the necessary taxes.
If you start to see status determination sheets where you disagree with the decision made by the end client, we strongly advise that you go back to the end client as soon as possible to discuss this. Even though currently the process for appeal has not yet been made clear, we will assist and support our clients where possible to reach a conclusion.
What happens if my contract is ‘inside’?
You should be cautious of continuing a contract that a client has found to be ‘inside’ where you have previously worked ‘outside’ as this may make you an easy target for an HMRC investigation in the future. If you decide to stay on, we would suggest challenging the status determination and keeping the evidence to prove that you disagree with your ‘inside’ status. This may also be a good time to renegotiate your fee, to try and make up for your take-home pay shortfall.
If you are deemed inside IR35 by your end client, the way you get paid will change. Prior to April 2021 you’d receive the gross amount into your Limited Company before any tax deductions. The new rules post April 2021 require that either the end client or third party agency that pays your invoices, deducts the necessary PAYE (as if you were an employee) from your gross invoice first before this is paid to your company bank account.
Do I have to use an umbrella if I’m found ‘inside’?
We have noticed that some agencies and end clients started pushing contractors inside IR35, suggesting to clients that they are not able to do this through their existing Limited Company and instead should be using an umbrella company. It is important to note that you can still use your Limited company and it may still be the best way of operating even if you are inside IR35 in the new rules as a subsequent contract may not be.
But just in case, all Aardvark clients can use our sister company SG Umbrella for free. So, should you need to go down the umbrella route, then as part of our monthly accountancy packages, we have included for free the ability to switch between limited and umbrella for your contracts if needed, without any hassle.
Should I close my Limited Company?
You should consider your options very carefully before deciding to close your Limited Company. Doing so means that you would be unable to open a new company within 2 years without losing some of the tax benefits that closing could bring. It’s likely that end clients will go through a settling period and that more contracts will be found ‘outside’ over time, so we would suggest keeping your Limited Company open during this period.
How can Aardvark Accounting help?
At Aardvark, we specialise in contractor accounting and advise all of our clients on an individual basis on their concerns around IR35. We’re supporting our clients in their discussions with end clients and agencies and all of our support, as well as access to our Umbrella solution is included in our monthly fee.
As always, ‘we’re all ears‘ so, if you have any questions please don’t hesitate to contact us on 01425 471917, however as we start to see any further firm plans being issued we will let you know.