Changes to off-payroll in the private sector (IR35) were initially scheduled to be introduced on 6th April 2020. However, due to the coronavirus pandemic, the government decided to delay the legislation changes until 6th April 2021. The implementation date is fast approaching, and the temporary workers' supply chain does not have long to prepare. This article will look at how limited company contractors can prepare for April 2021 – to ensure the transition is smooth and the impact is minimal.
Understand IR35
IR35 has been around since 2000, but it frequently been amended. The most notable developments over the last five or so years has been changes to off-payroll in the public and private sector.
Changes to off-payroll in the public sector were rolled out on 6th April 2017. Before this date, contractors working in the public sector were able to determine their IR35 status and pay themselves accordingly. However, they lost this obligation, and after 6th April 2017, it became the public sector organisation's responsibility to assess each temporary workers' IR35 status.
If a contractor was deemed outside IR35, they could continue operating through their limited company and pay themselves tax-efficiently (dividends and salary). However, if they were considered inside IR35, they would be taxed at source by the fee-payer in the supply chain, meaning their take home pay retention was noticeable lower than outside IR35.
Similar legislation changes are coming into the private sector on 6th April 2021. Contractors working for medium and large organisations in the private sector will lose their right to determine their IR35 status, and this responsibly will be passed onto the end-client.
Off-payroll changes have certainly shaken up the temporary staffing sector, but they have not put an end to contracting through a personal service company (PSC). If you're a contractor, you must understand the current situation so that you can continue to operate compliantly and in your best interest.
Seek IR35 status clarification
Limited company contractors in the private sector should already be familiar with the impending changes in legislation. If your assignment runs beyond 6th April 2021, your client should already have made you aware of their IR35 determination. And, if you’ve accepted a new role that commences after 6th April 2021, or you’re about to, you must make sure your client has considered IR35 and have made you aware of your status.
Status Determination Statements (SDS)
Following on from the previous point, private sector organisations will be required to issue every temporary worker they hire with a Status Determine Statement (SDS). This is an official document that outlines whether they deem a temporary worker as inside or outside IR35. And, most importantly, it will explain their decision.
If you are a contractor and you’re issued with an SDS that you don’t agree with, or you think is flawed, you have the right to appeal. Contact your client and ask them who to contact regarding the appeal, and they have 45 days to issue you with a thorough response and explanation.
Know how to appeal IR35 assessments
If you are a contractor and you’re issued with an SDS that you don’t agree with, or you think is flawed, you have the right to appeal. Contact your client and ask them who to contact regarding the appeal, and they have 45 days to issue you with a thorough response and explanation.
Look into appropriate IR35 protection
Private sector organisations must take "reasonable care" when they create Status Determination Statements. However, some will inevitably make mistakes, and contractors could potentially suffer as a consequence.
Several insurance providers in the UK are now offering special packages to help contractors with IR35. We've noticed 'IR35 Protection Insurance' and 'Tax Liability Insurance' - to name a couple of policies that have been introduced into the marketplace. These will help you if HMRC ever investigates your tax affairs due to inaccurate IR35 assessments conducted by your end-client. Most of these insurers will also offer a tax status service – meaning they can review your contract if you would like an expert to ensure your end-client has come to the correct decision.
Learn how umbrella companies work, if they’re a new concept
If you’re inside IR35, you won’t be able to pay yourself with a combination of dividends and salary because tax and National Insurance deductions will be made on your behalf by the fee-payer. Therefore, you will probably be better off using the services of an umbrella company for your payroll.
Umbrella companies provide a payroll service for contractors and freelancers. By registering with one, you become their employee and they’ll process your payroll and issue you with payslips. As an umbrella employee, you’ll be entitled to employment rights, including statutory sick pay and maternity/paternity pay.
The only income umbrella companies generate for themselves is the margin they deduct for processing your payroll. Usually, umbrella company margins vary between £15 and £30 per week.
It no secret that using an umbrella company will not be a satisfactory solution for limited company contractors who are used to operating outside IR35. However, if you find yourself in a position where you’re working inside IR35, umbrella companies may provide you with a perfect temporary payroll solution. There is no tie in period when you engage with an umbrella, and you’re free to use their payroll service as little and often as you please.
Consider options, and seek assignments outside IR35
Umbrella companies are there to provide you with a compliant payroll service – should you need them. However, if you’re inside IR35 – you may want to consider your options. Contracting through a limited company is not a concept that is coming to an end. There will still be contract roles out there that are specified as outside IR35. However, when the government introduced off-payroll legislation changes into the public sector, it took some time for organisations to adapt.
It’s a great idea to keep your limited company ticking over. If you have a contractor accountant, you should speak with them to find out your best options – should you need to use an umbrella at some point down the line. They may offer s epical dormancy service that significantly reduces your month accountancy fees. Or, they might even have their own umbrella payroll service that you can switch between – when necessary.
This article has been written by Andrew Trodden, Marketing Team Leader at Umbrella Company UK.