IR35 changes 2020 explained – and how to get ready for them
If you want the IR35 changes 2020 explained clearly, it’s best to start with a recap of what IR35 actually is.
In essence, it’s legislation that’s supposed to clamp down on the practice of workers supplying their services via some kind of intermediary – but who are really ‘employees in disguise’.
IR35 isn’t designed to penalise real contractors, but rather ‘permtractors’ who – to all intents and purposes – are employees, except for the fact they are paid via a limited company.
What HMRC wants to do is to identify these people and tax them as though they were normal employees. So, if it deems someone to be a ‘disguised employee’, then the contractor has to pay income tax and NICs on their contracting fee.
It has never been an easy set of legislation to apply. Some contractors have found they’ve been deemed ‘disguised employees’ under the terms of some contracts, but not under others. The rules are rather complex, but you can use this online tool from HMRC to check employment status for tax. (Although be aware, this tool had teething problems).
What are the IR35 changes due in April 2020?
The big change being introduced on 6th April applies to the private sector and reflects rules that were introduced for the public sector in 2017. In a nutshell, the end client – the company contracting out the work – is now responsible for determining a Personal Service Company (PSC)’s IR35 status.
(Note that this change does not apply to smaller end clients that meet two of these three criteria: 1. Annual turnover £10.2m or under; 2. Balance sheet £5.1m or under; 3. Fifty employees or fewer.)
Under the new system, the end client has to provide a ‘Status Determination Statement’ (SDS) that confirms the IR35 status of each contract. If a contractor is hired via an agency, a copy of the SDS must be given to the agency as well as the contractor.
The key point of this change is that HMRC can recover tax liabilities from the highest party in a supply chain, regardless of which party in the supply chain is not complying.
The financial impact of IR35
If a contractor falls within IR35, HMRC will not only automatically request their previous years’ tax returns, but workers will receive between 24% and 38% less net pay than they did as contractors. When the rules were applied to the public sector in 2017, HMRC collected an extra £410m from contractors during the next year. It’s projected that it will take an additional £3.12bn from contractors over the next four years from April (i.e. about twice as much tax as before!)
What do I do next?
What you do next depends on whether you are an end client or a contractor. Ideally, both will normally want contractors to fall outside IR35 – and there are a number of ways you can do this compliantly and efficiently.
The million-dollar question is how to do this. At THP, our accountants can help you – but you would need to put our advice into action at least two weeks before 6 April to make sure a contractor’s March invoice isn’t affected.
So time is running out. To make sure you are in the best position to handle the IR35 changes, get in touch with us today!
About Ben Locker
Ben Locker is a copywriter who specialises in business-to-business marketing, writing about everything from software and accountancy to construction and power tools. He co-founded the Professional Copywriters’ Network, the UK’s association for commercial writers, and is named in Direct Marketing Association research as ‘one of the copywriters who copywriters rate’.