Chancellor Hammond IR35 Changes
The Chancellor Hammond IR35 changes in the November 2018 Budget will mean that around half of contractors will have to close their limited companies prior to April 2020.
They will either pay the IR35 tax, which will mean a 25% drop in take home income, or join umbrella companies.
So, it is crucial that contractors and freelancers are in the half who will still be allowed to use their limited companies.
Who Decides Contractors IR35 Status?
The main Chancellor Hammond IR35 changes in the Budget are about who decides the IR35 status of freelancers.
It was always the case that freelancers decided their own statuses.
If they got it wrong they risked an IR35 investigation by HMRC lasting years.
However, there was safety in numbers.
Contractors are more likely to be struck by lightning than be investigated for IR35
Now, the Government has changed all that.
The Client Will Determine Contractors IR35 Status
In future, the fee payer (the client) will determine the statuses of contractors.
If they get it wrong there will be huge financial penalties on them.
In saying that they will be financially penalised if they get it wrong, that applies only if they get it wrong in the contractor’s favour.
If they get it wrong in HMRC’s favour there are no penalties at all.
So, the Government have rigged it in HMRC’s favour.
Chancellor Hammond IR35 Changes in the Public Sector
This was rolled out in the public sector in April 2017.
Despite the massive problems encountered, the Government are going to roll it out in the private sector too.
However, they have given themselves 18 months to get it right.
Contractors IR35 Action Plan
So, what can contractors do about these Chancellor Hammond IR35 Changes?
Well, it may seem to be stating the obvious but they must make sure that they are operating outside IR35.
Their contracts must be outside IR35 and their way of working must be outside IR35.
That may or may not be possible depending mostly on he way they work.
Check Employment Status for Tax Test
HMRC sets great store by the Check Employment Status for Tax (CEST) test for IR35 that they created.
Of course, this CEST test has no basis in law but is only what HMRC believe is inside IR35.
However, they have an interest in the result.
They’ve also lost many cases in the Special Commissioners, General Commissioners and in court when they believed that a contractor was inside IR35 when he, or she,wasn’t.
So, they are not great judges.
More importantly, they are not independent judges.
Most people, outside HMRC, believe the test is a nonsense.
Prime Minister and Chancellor Hammond IR35 Changes
That appears to include the Prime Minister Theresa May and Philip Hammond the Chancellor.
The Chancellor has just announced in the Budget that the CEST test will be reviewed.
However, freelancers must play by the rules of the game as they are.
Sit the CEST IR35 Test
The first thing they must do is to sit the CEST IR35.
After the Chancellor Hammond IR35 Changes, client companies will now decide the statuses of freelancers whom they hire.
If they get it wrong there will be heavy financial penalties on them.
However, if they get it wrong after the freelancer has passed the Check Employment Status for Tax test there will be no penalties on the hirer.
So, that is a massive incentive for client company freelance hirers to make contractors sit the test.
Contractor IR35 Test Pass Rate
So, how many contractors pass the test and how many fail?
With 750,000 people having taken the test the figures are as follows:-
54% – Pass
41% – Fail
15% – Indeterminable.
As clients are unlikely to risk financial penalties they are unlikely to allow those that are indeterminable to operate via limited companies.
Half of Contractors Can’t Use Limited Companies Any More
So, after he Chancellor Hammond IR35 Changes in April 2020 it is likely that around half of contractors who now use limited companies will no longer be able to use them.
Even if you believe that you are outside IR35 and will pass the test you would still be better to sit it now rather than wait for clients to make you sit it.
If the client makes you sit the IR35 test they have to handover the results to HMRC.
IR35 Test Results Passed on to HMRC
That is for ‘future reference’.
HMRC may see these and decide to investigate you for previous contracts.
There’s always the possibility that you will fail the test – and HMRC will be informed.
So, it is best to sit the test now on your own volition just to make sure.
Find it here – Check Employment Status for Tax test.
Be honest with yourself.
Don’t give yourself the benefit of the doubt – as client hirers sure won’t.
They won’t take a chance on being hit by a huge penalty for your sake.
Indeed they are likely to err on the cautious side.
Improve IR35 areas Where You are Weak
Ten read our articles 16 Factors That Show Whether You are Inside IR35 or Outside IR35.
Once you see how you have done, look at the weak areas and try to improve them.
Get your contract and working practices changed to reflect this.
Some clients may allow you to do this and some may not.
That’s another good reason to sit the test now.
It gives you the opportunity to get your contract and working practices changed at renewal time – or on your next contract.
Even if you pass the CEST test, you should still try to improve your contract as regards IR35 compliance.
Failing the Check Employment Status for Tax Test
If you fail the Check Employment Status for Tax test it would also be a good idea to plan in advance what your options are.
If you can no longer use your limited company, the options are just to have the IR35 tax deducted from your income by your agency – or to join an umbrella company.
So, what happened after the Chancellor Hammond IR35 changes in he public sector?
When this happened in the public sector most locums, agency nurses, IT contractors etc. joined umbrella companies.
Choosing the Right Umbrella Company for You
However, there are many of these umbrella companies and it is hard to pick the best one for you.
It might be a good idea to fill in the boxes at the bottom of this page so that they can get back to you on which umbrella company would be best for you.
They can let you know how much you will earn if you join an umbrella company.
There is no compunction on you to buy.
I know it is an ad, but I would still recommend freelancers doing it even if it wasn’t.
It makes sense to know what the alternatives are if you have to dump your limited company.
So, freelancers should prepare as soon as possible for what is going to hit half of them in April 2020.
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