If you’re an individual contractor trading through your own Limited or Personal Service Company (PSC) you will be aware of IR35 Legislation which has been in place since April 2000.
Since this date it has been the contractor’s responsibility to determine whether a contract falls ‘inside’ or ‘outside’ of IR35.
If the engagement falls outside of IR35 then for tax purposes the individual can treat the business as a normal limited company, taking advantage of all allowable expenses, including pension contributions, and can remunerate themselves in a tax efficient manner, ie via low salary and higher dividends.
If however the contract is ‘caught by IR35’ then, aside from a 5% allowable deduction for general expenses, all net income (or sales turnover) is taxed as if it were PAYE.
However HMRC identified a compliance problem – they believe that only around 10% of all contractors who should be treating their contracts as caught by IR35 are doing so. Which means that, in HMRC’s opinion, 90% of said contractors are paying much less income tax than they should be.
Therefore in April 2017, the Government changed the legislation for public sector companies, such as the BBC and the NHS as well as HMRC themselves, to put the onus on the employer or ‘engager’ to determine the status of any contract.
This clamp down on ‘disguised employment’ has resulted in many organisations taking a blanket approach to contractors and determining that all are caught inside IR35, rather than risking substantial penalties for making an incorrect employment status determination.
In the October 2018 Autumn Budget, the Chancellor announced that IR35 reform in the private sector would be delayed until April 2020. The consultation on how this would operate in practice was published in March 2019, and draft legislation then published in July 2019. You can read more detail in the draft Finance Bill 2018-19 here.
These changes will not apply until April 2020 and will only apply to large and medium sized businesses, so if your PSC is engaged by one of the smallest 1.5 million businesses you will still be responsible for determining the employment status of any engagement.
While there is still time, and the detail of the reform is not yet confirmed, we would recommend that you have your current engagements reviewed.
Many thanks to the team at Caunce O’Hara, insurance brokers specialising in the contractor and freelance market, who have pulled together their six reasons why PSCs should do this now:
“The action that PSCs should be taking is to have their current engagements reviewed for five very good reasons:
1. In the short term nothing changes for PSC contractors – you are still the decision-maker and the entity which will suffer the tax liability. If you get it wrong, HMRC won’t just want to tax you; they will want interest and will want to know how you reached that decision. If you can’t show due diligence, then expect a penalty of at least 15% of the tax at stake.
2. And that responsibility will even continue after April 2020 if your PSC is engaged by one of the UK’s smallest 1.5million businesses as defined by the 2006 Companies Act.
3. HMRC have suggested that they are keen that decisions made are forward looking and they will not immediately assume that an engagement which is caught after April 2020 was caught before. But they haven’t categorically ruled out that they won’t look back in time. So surely it makes sense to know where you stand now.
4. When the decision-making process changes for medium and large sized businesses, agencies and end clients and will want hard evidence – not emotional pleas – to be convinced that an engagement is ‘not caught’ by IR35. Well-reasoned evidence with a clear conclusion; a documented argument to convince the agency and the end-client to agree the ‘not caught’ opinion.
5. If HMRC challenge the decision, it is much harder for them to win their argument if all parties have agreed the status decision, based on a clear, independent assessment.
Caunce O’Hara & Co Ltd would also like to help PSCs and provide a sixth reason:
6. Finally, we are offering PSCs the benefit of a fully comprehensive contract review. You will receive a full report which considers both the contractual terms and the working practices based on case law, and which will provide a clear unbiased and independent opinion – an opinion which could save you thousands of pounds if HMRC do start an enquiry.“
If you have any questions relating to tax, accounts and remuneration for your Personal Services Company, please feel free to contact the team at IN Accountancy who will be happy to help. If you would like an introduction to the team at Caunce O’Hara, you can either contact them directly via their website, or again we will be happy to make an introduction.