In 2017, the government and HMRC introduced legislation that affected all Limited Company contractors working in the public sector such as hospitals, schools and transport. In 2020 the government will introduce this into the private sector and as you currently work in the private care/ private care home sector as a Limited Company contractor, this will soon impact you.
What is IR35?
IR35 is the name given to the government’s tax legislation which focuses on identifying ’disguised employees ‘, being individuals who are providing services to a client through an intermediary company, such as a Limited Company or PSC, but whose relationship with the client would be one of employment were it not for the presence of the intermediary such as an agency. Where this is the case, the IR35 rules require the intermediary (agency) to deduct and make payment of the equivalent taxes as would be payable by a typical PAYE employee.
What does working inside IR35 mean?
Being ‘inside IR35’ means that, for tax purposes, employees are deemed to effectively work for their end client in the same way as a permanent employee and are therefore subject to PAYE. Operating inside IR35 generally means that the employer (this could be an umbrella company or recruitment agency) deducts the appropriate taxes and National Insurance contributions from your wage ‘at source’, which basically means before it reaches your bank account. If you are operating inside IR35, you must ensure that you are paying the appropriate taxes over the course of a financial year. This may include paying a deemed payment (e.g. higher taxes) at the end of the tax year.
How is IR35 determined?
The exact rules around IR35 tests are fairly complicated but the basic idea is that if someone is just doing contract work for one business, and is told directly by that company what to do, they are an employee, not an independent business. Therefore they should be getting paid and paying tax as an employee, not as a Limited Company.
Who will it affect?
This will now affect all Ltd Co employees from April 2020, in all public and private sectors, not just healthcare. As mentioned previously this legislation only affected the public sector but now it applies to all.
What does working outside IR35 mean?
Being ‘outside IR35’ means that you are deemed to be operating more independently than a permanent employee would. This means that, through your limited company (also known as a personal service company), you are responsible for managing your own taxes. In addition, you will be able to pay your own salary and draw the remainder of your income as dividends.
Could I fall outside the legislation?
It is unlikely that you would be deemed outside and when this was bought in previously to the public sector, the vast majority of nurses fell into the legislation. Ultimately, the clients you work for will make the determination but it is unlikely as if they make an error they will come under severe scrutiny.
Can I check my status myself?
Yes. The HMRC have re-released a more robust CEST (Check Employment Status for Tax) tool which is an easy to use online assessment with accurate results based on your answers. This has been criticised in the past for incorrect results, however, improvements have been made to this tool to deliver more accurate results. This will allow you to see if any role you will be carrying out will fall inside or outside of IR35.
Following conversations with our largest client groups, the majority of our clients are issuing a blanket approach on all shifts falling inside of IR35 due to their requirements.
I thought this was just a rule within the public sector?
Since 2017, IR35 has been in place within the NHS and other public sector bodies, however, it has since been decided that this will be rolled out to the private sector also.
When will IR35 be implemented?
This is due to be in place by 6th April 2020.
Can I work with you through an umbrella company?
Unfortunately not. We recently engaged with one of the biggest provider of Umbrella services in the UK and they confirmed there was no real benefit to employees in our sector.
Can I still work as Limited Company until April 2020?
Yes, of course, however, you need to be aware that due to the imminent changes, you will need to convert to PAYE come April.
I’ve heard some umbrella companies offering 90% or even 95% take-home pay, can this really be true?
If something seems too good to be true, then it usually is. Prior to April 2016, contractors being paid through an umbrella company were able to claim for travel and subsistence costs to reduce their tax liability. However, HMRC released tougher measures on these types of expenses from April 2016, under the SDC rules. This means that the previous advantages of being paid through an umbrella company have been lost. In fact, your take-home pay is now the same or better via PAYE than umbrella companies as they usually deduct a processing fee.
What happens if I do not adhere?
You could potentially face an IR35 enquiry which could result in a life-changing fine for you.
What is an IR35 enquiry?
An IR35 enquiry is a case brought forward by HMRC and occurs when a worker is found to be wrongfully claiming to be outside IR35 when, in fact, they are inside IR35. HMRC will pursue the guilty party in an effort to recoup lost income tax and National Insurance contributions. Additional interest and a potential penalty fee may also be deemed payable. For those found culpable, these charges can often stretch to tens of thousands of pounds.
Who should I refer to if I have more questions?
Your accountant will be in the best position to provide you with more information based on your personal circumstance so they should seek advice from them if they have any additional questions.