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HMRC are introducing new IR35 rules governing the way contractors are taxed if they provide services through a personal limited company.
This new IR35 legislation was intended to be in the delayed Autumn 2019 budget. However, it is expected to resemble similar rules introduced to the public sector more than a year ago.
Contractors who provide their services through a limited company currently decide their own tax status.
If, by applying HMRC rules, they deem themselves as an employee, just for tax purposes, they are inside IR35 and should tax themselves accordingly.
If they assess themselves as being an independent contractor, in business in their own right, they are deemed outside IR35 and are free to tax themselves subject to broader HMRC rules and a lower tax liability.
The new IR35 rules pass responsibility for deciding the tax status of the contractor to the end user. Importantly, the legislation provides for some protection for contractors if they do not agree with an assessment, including where a company may make a blanket determination for all contractors.
If your company uses contractors, directly, or through a recruitment business, and your business is not classified as a small business, these rules will apply to you.
But there is no need to panic or remove all contractors, the impact for your business may be relatively minor.
If a contractor is deemed to be outside IR35, then you need do nothing.
If a contractor is deemed to be inside IR35, there are a number of routes by which the contractor can be correctly paid with tax and National Insurance deducted:
- The contractor can be paid via a PAYE payroll, either yours or a recruitment business
- The contractor can move to an umbrella company;
- The contractor can continue to be paid into their own company but whoever pays them must account for tax and National Insurance.
If a contractor is deemed to be inside IR35 there will be an impact to the structure of costs charged to you as Employers’ National Insurance contributions will now be incurred. We will discuss this with you nearer the time.
So, what should you do before April?
- Check whether you engage any limited company contractors, directly, or through recruitment businesses, who are likely to be in place in April.
- IR35 status is determined by a combination of the work undertaken and the contractual rights and obligations of both parties. Cedar’s contracts are drafted to ensure an assignment will fall outside of IR35 if the nature of the work is outside of IR35. As soon as you are able, be clear on the nature and scope of roles being undertaken by individual contractors, documenting tasks and outcomes.
- Review your contracts for IR35 suitability if you contract direct, use an outsourced recruitment provider, or issue your own terms to recruitment businesses.
So, what will Cedar be doing before April?
- Whilst Cedar recently reviewed it’s contracts, once the legislation is finalised, we will undertake a final review to ensure they are IR35 compliant.
- We will provide a summary of our contractual terms to help you determine the status of contractors we supply.
- Nearer to April Cedar will contact you to discuss the assessment of the contractors we supply.
If you would like a copy of Cedar’s detailed Q&A or would like to register your interest in one of our forthcoming free IR35 events please contact your consultant.