Government IR35 Rules To Cost Half of Freelancers / Contractors £14K PA

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Government IR35 Rules - IR35 Compliance
Government IR35 Rules - IR35 Compliance

Government IR35 Rules

New Government IR35 rules are likely to cost half of all contractors £14,000 a year on average if implemented.

That is what is estimated by contractor lobbying group IPSE.

The Government ended a consultation period as to what to do about private sector contractors without making any real changes to their proposals.

They have already changed the rules for public sector contractors in April 2017.

The Government IR35 rules will change in the private sector too.

The Government IR35 rules changes were announced in the November 2018 budget and will be implemented in April 2020.

Self Employed Contractors v Permanent Employees

The Government believe it is an ‘anomaly’ that self employed persons earning £100,000 a year pay less tax and national insurance than a permanent employee earning £100,000 a year.

They said that they mean to ‘fix’ this.

In the public sector they changed the rules so that contractors could no longer determine their own IR35 status as they did previously. It will change in he private sector too.

Fee Payer Will Decide Contractor IR35 Status

This task would, therefore, fall to the ‘fee payer’ under the new Government IR35 rules.

In most cases this would be the company who hires the contractors.

There could be penalties on the company if they got it wrong.

So, they will err on the side of caution.

Government IR35 Rules – Check Employment Status for Tax

They use the Check Employment Status for Tax (CEST) online IR35 test  which HMRC created and which is heavily weighted against the contractor and for HMRC.

With 750,000 tests taken, it shows 54% of contractors passing the test and 46% either failing or being indeterminable – which comes to much the same thing as departments won’t take chances.

What happened in he public sector was that, rather than just paying the IR35 tax, contractors had to shut down their limited companies and join umbrella companies.

Contractors Take Home Pay Fell

So, the Government IR35 rules meant that their income fell by an average of £14,000 a year.

However, the more they were paid, the more they lost. Some locum doctors and IT Contractors claimed that they lost 30% of their income by making the switch.

That was substantially over that £14,000 a year.

By operating via a limited company a contractor may retain up to 80% to 85% of their income.

Operating via a PAYE umbrella company may mean them retaining as little as 55% to 60% depending on earnings.

It will also be the same in the private sector from April 2020 when they implement the Government IR35 rules there.

For more crucial advice on IR35 click on IR35 Tax for lots more advice articles

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