Contractors Future After IR35 Reforms
Contractors Future will be very different after the implementation of the Government’s IR35 reforms in April 2020. The Government considers many contractors as off-payroll workers and wants to tax them at the same rate as permanent employees. This will mean that many contractors will pay much more of their income in tax. We look at the different options for contractors.
Questions About Contractors Future After IR35 Reforms
- Will Contractors be caught by a blanket ban on using personal service companies?
- What’s the difference between a blanket ban and a blanket assessment?
- So, what will contractors caught by a blanket ban do?
- What if a contractor is outside IR35 and the company has no blanket ban on PSCs?
- Are contractors still outside IR35 now safe?
- Is contractors’ future now settles or will the Government come back for more?
Will Contractors Be Caught By Blanket Ban on Using Personal Service Companies
This will not be up to the contractors It will be up to the company hiring the contractors. HMRC and the Government say that contractors would be tested individually to see if they are inside IR35 or outside IR35.
HMRC set up the Check Employment Status for Tax (CEST) online tool to test contractors. Supposedly that would show whether contractors are inside or outside IR35.
Their tax status would be determined by that. Indeed, HMRC said that if a company found a contractor outside IR35 using the test, HMRC would not come after the company for the contractor’s tax even if it was later shown that he, or she, was inside IR35.
Admittedly, that is a highly unlikely scenario as HMRC created the test and weighted it in their favour according to many tax experts.
However, if you are found outside IR35 by the test that should be it.
What’s the Difference Between a Blanket Ban and a Blanket Assessment
A blanket ban is where a company decides that they will take on no more contractors using personal service companies. They are allowed to do that.
A blanket assessment is when a company assesses contractors as a group rather than as individuals.
HMRC say that companies should not have blanket assessments of their contractors using the CEST test. They should test them individually
However, some very timid companies like Barclays Bank, HMRC and Morgan Stanley have decided to have a blanket ban on hiring contractors who operate via personal service companies.
This will mean that many contractors who are really outside IR35 will pay taxes as if they are inside IR35 because of these blanket bans.
So, what will contractors caught by a blanket ban do?
Companies operating a blanket ban are giving their contractors three options generally:-
- Take a permanent job with the company
- Leave the Company
- Contract via a 3rd party, e.g an Agency, a Managed Service Company or an Umbrella Company
Take a Permanent Job With the Company
Option 1, taking a permanent job, is not very attractive to most contractors. Many would, in reality, be taking 50% pay cuts. They would also be joining the company at levels that they would have surely long surpassed if they had stayed permanent. There are only a certain amount of permanent jobs anyway at the company.
Leave the Company
Many contractors would feel like choosing Option 2, leave the company. However, it is never clever to quit a contract when you have nothing to go to.
Contractor Via an Agency, Managed Service Provider or Umbrella Company
Most contractors will choose option 3. So, which of the three options in Option 3 will they go for – Agency, MSP or Umbrella Company?
Contractors Future Contracting Via Agencies
Most agencies, except the very biggest, don’t run their own payroll systems. They also don’t want to be the ones that the Government chases to pay the contractors’ tax if they are found to be inside IR35.
Contractors Future Contracting Via Managed Service Providers
So, that leaves two options. Many companies use Managed Service Providers like the big consultancies. However, if the contractor just moved across to the Managed Service Provider there would be a sudden and huge increase in cost to the client company.
Those MSPs are not in the habit of charging people out at less than a grand a day. And they would also prefer to charge young graduates out at that rate and more rather than pay several hundred pounds a day to contractors.
Contractors Future Contracting Via Umbrella Companies
So, that leaves umbrella companies. When the IR35 reforms happened in the public sector in April 2020 this is the route that most contractors took if they either failed the CEST IR35 test or were victims of a blanket ban on personal service companies.
There is still some benefit in using umbrella companies rather than just paying the IR35 tax. It also means that contractors can leave all the admin to the umbrella company. They do pay a monthly fee but they save on an Accountant.
What If a Contractor is Outside IR35 and the Company Has No Blanket Ban on PSCs
These are the lucky contractors. They can continue to use their personal service company They can continue to receive the financial benefits of using one. Currently 54% of all contractors tested by HMRC’s Check Employment Status for Tax IR35 test are found outside IR35.
However, they should not rest on their laurels. Statements by the Government and HMRC show that they believer that virtually all contractors should be paying PAYE.
Are Contractors Still Outside IR35 Now Safe
Ex-Prime Minister Theresa May and Chancellor Philip Hammond both said that “it is an unfair anomaly that a self employed person earning £100,000 a year pays less tax than an employee earning £100,000 a year”
They set out to fix this ‘unfair anomaly’. So, do you think the Government will leave the 54% of contractors who pass the test alone in the future?
We’ll here’s a clue. When answering a question about IR35 in Parliament, Treasury Minister, Jesse Norman, said that there was only 10% compliance in this area. That means that they reckon that 10 times as many contractors should be paying PAYE as currently do.
This statement was echoed by HMRC a few weeks later, i.e that there is only 10% compliance in this area.
Is Contractors Future Now Settled or Will the Government Come Back for More
So, the 54% of contractors who pass the test (and are not affected by blanket bans), should be pleased.
However, this is likely to be only a temporary stay of execution.
Contractors Future is still in the balance. We do know, however, that the Government believes them all to be tax avoiders.
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