David Redfern, Director of DSR Tax Claims, takes a more in-depth look at the changes to the IR35 tax rules and how they could potentially affect electrical contractors.
The Chancellor, Rishi Sunak, has announced that the implementation of the IR35 tax rules will be delayed by a year in light of the Covid-19 pandemic.
After months of delay, changes to IR35 – otherwise known as off-payroll working rules – have been announced to the private sector. These regulations, which determine how a worker should be treated for tax purposes, have been dogged by controversy and accused of taking a wrecking ball to the contracting industry. So, what are the IR35 changes and will they apply to you or your business?
What is IR35?
These regulations were intended to prevent tax avoidance by contractors who HMRC suspected of being employees in all but name. Where contractors use an umbrella company or PSC (personal service company), they’re able to take advantage of the more favourable taxation rules which apply to companies rather than sole traders or employees who are taxed through the PAYE system. HMRC was concerned that many of these contractors were working in ways which made them indistinguishable from PAYE employees whilst paying less tax.
Since its introduction in 2000, the off-payroll working rules have undergone a number of revisions over the years and in 2018, HMRC moved the responsibility for determining a contractor’s employment status for taxation purposes from the contractor to the client for all contractors working within the public sector. From April 2020, this change is rolled out for contractors working on contracts for large private sector companies. HMRC estimates that this will bring an additional £3.1 billion in tax revenues between 2020 and 2024.
Who will it affect and how?
These changes will affect contractors working on contracts for large private sector clients. HMRC defines a large private company as one with a turnover greater than £10.2 million per annum, or balance sheet assets of more than £51 million with more than 50 employees. Smaller private companies which don’t meet this threshold will be unaffected by this most recent change.
If the client is classed as a large private company under the above criteria, then the responsibility for determining the employment status shifts to the end client.
Sole traders are unaffected by the changes as they don’t operate through the company structure and instead are taxed through Self Assessment.
What determines employment status for tax?
End clients can use an HMRC tool, CEST (Check Employment Status for Tax) to help determine how a contractor should be treated. The tool looks at the working practices of the contractor to determine whether the contractor is in disguised employment.
If you carry out work for a fixed fee, are paid at the end of a project, have control over how, when and where you work and can work for a number of different companies, you’re unlikely to fall under IR35. However, if your working hours are determined by your client and they control how, where and when you work, it is likely that HMRC will determine that you’re in disguised employment.
What’s the potential impact of the latest changes?
To say that these changes have been controversial is an understatement. Various contractor groups have accused HMRC of destroying the contracting industry, with reports that swathes of large private companies that may make the decision to off-load contractors rather than dealing with the potential fall-out of incorrectly determining the employment status of their contractors.
Otherwise, they’re making a blanket decision to class all contractors as ‘employees’ for tax purposes, rather than looking at each case on an individual basis. Contractor groups have also warned that companies are likely to offshore large projects rather than deal with the complexities of the off-payroll working rules. It could also lead to the booming of a large unregulated or non-compliant market. In addition, CEST has been criticised as a crude tool for determining employment status.
In order to attempt to ease the looming situation HMRC has stated that these rules will now only apply to services provided after 6th April 2021, rather than all payments made after that date, irrespective of when the services were provided. However, there are concerns that this will not be sufficient to offset the potential chaos from the start of a new tax year.
The new Chancellor, Rishi Sunak, has stated that HMRC will not apply the regulations in a heavy-handed way, for the first year at least – however, how this will actually play out for contractors is yet to be seen.
Get more taxation advice and support from DSR Tax Claims here.