Autumn Budget 2018 for Contractors – IR35 explained
The Autumn Budget 2018 announced that changes to off payroll working in the private sector would not be introduced before 2019/20 tax year, and even then would only apply to large and medium sized businesses.
We have had questions from a number of our contractor clients who are concerned about what any changes in relation to IR35 legislation may mean to them, so following on from our previous post about the changes to personal allowances and higher rate taxes meaning that many contractors will be better off to the tune of almost £1,000 from 2019/20 due to changes in income tax bands, please find below some additional information about off payroll working in the private sector, and what changes here will mean for you.
The only information given in the Autumn 2018 Budget relating to this is that the introduction of planned changes will be delayed from 2019/20, and even then would only apply to large and medium sized businesses.
What is the change specifically?
To increase compliance with the existing off-payroll working rules (known as IR35) in the private sector, businesses will become responsible for assessing an individual’s employment status. The reform simply brings the private sector in line with the public sector. It does not apply to the self-employed or introduce a new tax.
Why are these changes being made?
The off-payroll working rules were actually introduced in 2000 and require that individuals who work like employees, but through companies, pay similar taxes to other employees.
Contractors who do not comply with the rules pay significantly less income tax and NICs than an equivalent employee. HMRC estimates the cost of non-compliance to the exchequer will reach £1.3 billion a year by 2023-24.
The reform will bring the private sector in line with the public sector, where evidence suggests compliance has improved since the reform was introduced in 2017. HMRC estimates the reform has raised £550 million in income tax and NICs in its first year.
What does the reform mean for businesses?
From 6 April 2020, medium and large businesses will need to decide whether the rules apply to an engagement with individuals who work through their own company.
Where it is determined that the rules do apply, the business, agency, or third party paying the worker’s company will need to deduct income tax and employee NICs and pay employer NICs.
Can HMRC come after contractors retrospectively?
NO! You will be pleased to hear that HMRC will focus its efforts on ensuring businesses comply with the reform rather than focusing on historic cases. Nor will there be any targeted campaigns or enquiries by HMRC into previous years.
A further consultation on the detailed operation of the reform will be published in the coming months. This consultation will inform the draft Finance Bill legislation, which is expected to be published in Summer 2019. We will of course keep you informed of any further changes.
As always, we are happy to answer any questions you may have, and can be contacted by all the usual channels here: CONTACT US