IR35 Changes – Companies May Not Take Limited Company Contractors

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Private Sector Contractor IR35 Changes
Private Sector Contractor IR35 Changes

IR35 Changes in Private Sector

The Government will implement the IR35 changes that they made in the public sector in 2017 in the private sector from April 2020. In a survey by Brookson Legal Services 59% of companies who use freelancers said that they would consider a blanket approach to hiring contractors from that date.

Some questions contractors may ask are:-

  • What are the IR35 changes in the private sector?
  • How will contractors IR35 status be assessed?
  • Which Contractors will be affected?
  • Why are the Government making the IR35 Changes?
  • What can contractors do to stay outside IR35?
  • What will contractors do now?

What Are the IR35 Changes in the Private Sector

From April 2020 the Government will apply its new IR35 changes. The main difference is that instead of contractors deciding their own IR35 status, the company hiring them, will make the decision. If the company get it wrong they could end up paying the back tax themselves along with penalties and interest.

The big consultancies are now advising companies to make all contractors inside IR35 – to avoid risks.

The big consultancies have always seen contractors as rivals. They would rather companies pay them over a grand a day for recent gradates rather than take contractors with 10 years experience for £500 a day.

How Will Contractors IR35 Status Be assessed

HMRC have developed an online IR35 test called Check Employment Status for Tax (CEST).

This purports to show whether a contractor is inside IR35 or outside IR35. However, as HMRC lose the majority of tribunal cases to contractors they would probably not be the best judges of that. That’s even though they can choose the contractors who are most likely to be inside IR35.

They also have a vested interest in the result.

After almost a million tests almost half of contractors who operate through limited companies now are found to be inside IR35.

Companies to Operate Blanket Ban on Limited Company Contractors

However, according to the survey, 59% of companies are now considering a blanket ban on contractors using limited companies.

Instead, they will advertise all their contracts as being for non-limited company contractors. They will inform agencies that the contracts are inside IR35. Then they will tax all the contractors they hire like employees.

Which Contractors Will be Affected by IR35 Changes

They will now consider all those contractors who fail the CEST test to be working inside IR35. They will tax them like permanent employees. The fee payer, normally the agency, will have to deduct tax and national insurance before paying the contractor.

The hiring company must send on the details of the test to HMRC ‘for future reference’.

This opens up the possibility of HMRC investigating contractors for previous contracts.

However, a blanket ban would mean that all contractors working for a company will be affected by the IR35 changes.

Why Are the Government Making the IR35 Changes

It’s basically down to money. Ever since they implemented IR35 in 1999 successive governments have been squeezing freelancers harder and harder. They see it as an excellent source of extra tax.

Indeed Theresa May and Philip Hammond said that “It is an anomaly that self employed people who earn £100,000 a year pay less tax than a permanent employee earning the same amounts”. So, they set out to fix this anomaly.

What Can Contractors Do to Stay Outside IR35

Firstly they can check out our article IR35 Factors Affecting Contractor / Freelancers

Then they can do the Check Employment Status for Tax Test themselves to see how they get on.

What Will Contractors Do Now

If contractors are caught by a blanket ban on limited companies at a particular company there is very little they can do about it. What most contractors did when it happened in the private sector, was to join umbrella companies.

One would hope that those companies who decide to make a blanket ban on limited company contractors would hit problems hiring and would have to change their strategy in the future.

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