Contractors Beware – Changes to IR35 explained

The tax on contract work UK is changing. Changes to IR35 in April 2020 could hit you hard so you need to be prepared.

What can you do about tax on contractor work?

First, answer these three questions:

  1. Do I have my own limited company?
  2. Do I work as a contractor for a large company in the private sector – e.g. as an IT specialist in a bank?
  3. Do I need to know more about changes to IR35 in April 2020?

If you answered ‘yes’ to these questions then you need to act fast.

Manchester accountants, The Accountancy People, specialise in accounting advice for small business owners. We want to help you pay less income tax but keep you the right side of changes to IR35 in the private sector.

Changes to IR35 explained

IR35 is tax law that says if you behave like an employee then you should be taxed like one – employees pay a lot of tax. A good way to work out if you are IR35 compliant is to check your answers to the following questions:

Five ways to work out if you are an employee

  1. Do you have to do the work yourself?
  2. Do you have to work to set hours?
  3. Do you work a set number of hours?
  4. Are you paid by the hour, the week or the month?
  5. Do you get overtime or a bonus?
    If you answered yes to most of these questions you are probably an employee and not a self-employed contractor so IR35 will not apply to you.

Seven questions to help you decide if you are self-employed

  1. Can you hire someone else to do the work or to help you?
  2. Do you take commercial risk?
  3. Do you use your own equipment?
  4. Do you work to a fixed price and take the risk if it takes longer or the benefit if it takes less time than you expect?
  5. Can you decide how to do the job?
  6. Do you do work for different people?
  7. Do you have to correct work in your own time at your expense?
    If you answered yes to all these questions you are probably self-employed. If you work through your own limited company as a contractor for a private sector company then the changes to IR35 in April 2020 will affect you.

What are the changes to IR35 in private sector and how will they affect me?

• Traditionally the contractor was responsible for ensuring they were IR35 compliant – so HMRC would investigate the contractor if they thought there was a problem and the contractor would be fined and pay any tax with interest that HMRC said it was owed
• April 2017 is when changes to IR35 in public sector happened
• From then HMRC transferred that responsibility to the big organisation that was engaging the contractors
• That meant risk-adverse HR departments in the public sector, like the NHS, stopped offering contractor work
• That change is now coming to the private sector

Five things to know about changes to IR35 in April 2020

  1. Working as a contractor through your own Limited Company has been a good way to pay less income tax if you are IR35 compliant
  2. Up to April 2020, HMRC hold you responsible for making sure you meet the rules
  3. After April 2020 the company that engages you as a contractor will face fines, penalties and back payments if HMRC decides the contractors are not IR35 compliant
  4. The good side is you as the contractor are no longer at risk from an HMRC investigation deciding you are really an employee
  5. The downside is that, just as in the public sector, the medium and large organisations that have traditionally engaged consultants through Limited Companies may not want to take the risk on themselves

Five things you can do if changes to IR35 in April 2020 will affect you

  1. Speak to the HR department of the company for whom you currently provide a contracting service and find out what their policy is
  2. If they are satisfied that you operate as an independent contractor within the terms of IR35 then you may not notice a difference – but be aware that other companies may take a different view so when you’re looking around for your next contract you may find there’s a lot less choice compared to what you’ve been used to
  3. If the company or companies you’re used to working with have taken a blanket approach to ‘no contractors’ after changes to IR35 in April 2020 then you could try and find out which, if any, companies in your sector are still offering contracts and approach them – though competition is likely to increase meaning payment rates could fall
  4. See if companies you’ve previously worked with as an independent contractor will offer you a permanent employee role – this is likely to involve a fall in your income, not least because of the difference in tax levels for employees compared to the self-employed
  5. Be aware that the contracting landscape has changed – there are likely to be more people chasing fewer contracts, at least initially – and it would be surprising if that didn’t push down rates for contractors at least in the short-term

So how big a difference could changes to IR35 in April 2020 make to my income?

That’s difficult to say without knowing your personal circumstances but if you earn £50,000 through your limited company then you’ll pay 25% of that in tax overall. If you earn £50,000 as an employee, you will pay 32% of that in tax and National Insurance.

If you would like the changes to IR35 explained in relation to your specific circumstances then please get in touch with us. Here at The Accountancy People, we provide free accounting advice for small business owners in our no-obligation initial meeting with you.

You can see Manchester accountant James Sheard, founder of The Accountancy People, explain about the changes to IR35 in April 2020 by watching his videos on the subject. Sign up to his channel – it’s free – and you’ll be able to keep up with any changes announced in the budget on Wednesday 11 March 2020.

Here are James’s Contractors Beware videos: