IR35 status of Contractors
From April 2020 fee payers (client companies) will decide the IR35 status of contractors.
That change was made in Chancellor Philip Hammond’s 2018 November Budget.
Contractors currently decide their own IR35 status. However, that is going to change from April 2020.
The Government has just finished a period of consultation over IR35 reforms over bringing the public sector IR35 changes to the private sector too.
They reckon that this could bring them in an extra several billion in tax when they are looking to raise money for the NHS and cut the deficit.
Government Changed IR35 Rules in Public Sector
In 2017 they changed the rules in the public sector.
That was easier for them to do as they didn’t have to change the laws – only their own rules as they are the employer and fee payer.
They changed their own rules so that the fee payer, normally the client department, would decide the IR35 status of contractors.
If they got this wrong, they would be heavily hit by penalties.
That is a huge disincentive for them to hire limited company contractors.
HMRC Bring Out IR35 Test – CEST
HMRC brought out an online IR35 test called the Check Employment Status Test (CEST).
Clients or Employers (Fee Payers) would force contractors to take the online test before deciding the IR35 status of contractors.
However, this CEST IR35 test is heavily loaded in favour of HMRC.
For instance, there is no Mutuality of Obligation Test.
Mutuality of Obligation is one of the three main IR35 Factors when determining if a contractor is inside IR35 or outside IR35.
Results of Check Employment Status for Tax IR35 Test
More than 750,000 contractors have taken the test so far.
The results are:-
54% – Outside IR35
31% – Inside IR35
14% – Indeterminable
You can safely say that fee payer employers will not take a risk with those Indeterminable contractors.
So, it is really 54% to 46% – more or less a toss up.
This forced many contractors out of limited companies and into umbrella companies.
The temporary market is a growing market and it is estimated that the freelancers market is worth over £28 billion a year.
The Government would like a bit more of that.
Government Believe All Freelancers are Tax Avoiders
Advised, and egged on, by the big Consultancies, the Prime Minister and Chancellor both believe that freelancers are tax avoiders.
They both asked “Why should a self employed person who earns £100,000 a year pay less tax and national insurance than an employee who earns £100,000 a year”
They said that this was an anomaly and they intend to fix it.
Of course, we all know that is is not comparing like with like.
A self employed person has costs that an employee doesn’t have.
They don’t get the benefits that they get.
There is a higher risk factor as regards getting recurring income.
However, Prime Minister Theresa May and Chancellor Philip Hammond appear to believe that this ‘anomaly’ is highly unfair and plan to do something about it.
Changing IR35 Status of Contractors
So, they have announced changing the IR35 rules in the private sector so that the IR35 status of contractors is decided by the fee payer and not the contractor.
The Government announced these IR35 changes in the November budget and will implement them in April 2020.
The Government is hungry for extra tax money.
So, from April 2020 the client, who is the fee payer, will decide which contractors are inside IR35 and which ones are outside IR35.
To avoid any chance of penalties they are likely to err on the side of caution.
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