From 6th April 2021, the rules for determining IR35 status are changing and the responsibility for determining IR35 status will no longer rest with the contractor. Instead, for any engagements with medium or large businesses, the end client will need to decide whether a contractor falls inside or outside of IR35.
Where a contractor falls inside of IR35 (meaning that the contractor is considered an employee for tax purposes), the business that pays the contractor (also known as the ‘fee-payer’) will be required to deduct tax and NICs from the contractor’s income at source. Usually, this is an agency in the contractual chain.
The IR35 reform will therefore mean that a contractor will not decide their own IR35 status and will not need to worry about calculating a deemed employment payment. This will simply be collected by the fee payer and processed via their own payroll, making the necessary deductions.
Whilst this will ease some of the burden for contractors, if a contractor is taxed as inside IR35, this will result in a reduction in their take-home pay.
Considering previous tax years
IR35 reform will be implemented from 6th April 2021 and will affect all tax years going forward from the date that the legislation is implemented. It will not, however, affect tax years prior to 6th April 2021. For all those prior tax years, contractors will remain liable for determining their own tax status.
Whilst contractors will no longer be required to determine their own status for any new contracts, if HMRC decide to undertake an enquiry into a tax year prior to 6th April 2021, the additional tax interest and penalties will fall to the contractor.
It is important for contractors to recognise that, despite the implementation of IR35 reform, their IR35 risk won’t vanish entirely. Rushing to cancel tax enquiry insurance is far from wise. Whilst HMRC may have stated that they are not going to use the legislation to open IR35 enquiries into earlier years where a contractor’s IR35 status is reclassified as ‘employed’, this should not be relied upon. In considering recent times it is clear that in terms of increasing revenue, the Government need all the help they can get.
It would be wise to assess your risk and ask your accountant to calculate your IR35 liability for all tax years prior to 6th April 2021. Additionally, you should ensure that all of your contracts and working arrangements have been reviewed. In the event of any challenge by HMRC, you should be able to demonstrate that you have taken due diligence in determining your IR35 status and have evidence to support your status.
Determined inside IR35 under current rules
Currently, for private sector contractors who determine an engagement as inside of IR35, will need to calculate what’s known as a ‘deemed employment payment calculation’. This requires calculating the additional tax and NIC on income earned for a particular contract as though the contractor were an employee. Calculating the deemed payment can be quite complex and it would be prudent to ask your accountant or a tax specialist to do this for you. Once the ‘deemed payment’ has been calculated this will need to be paid over to HMRC at the end of the tax year. For a closer look at the ins and outs of deemed employment payment calculations, read our article The cost of being inside IR35.
If you are looking for a simple solution when it comes to determining and evidencing your IR35 status, get in contact with a member of our team to talk about our specialist range of services. Contact us on 0116 269 0999 or email [email protected].
Ask away! One of our team will get back to you!