Guidance to contractors about IR35 off-payroll changes from April 2021 | Webinar WIS Accountancy

Introduction

Hi, welcome back to our channel! My name is Gemma, and here at WIS, we talk about all things relating to money, mortgages, and positive money mindset. If that interests you, be sure to subscribe to our channel and hit the thumbs up—it really helps with our YouTube algorithm and ensures you won’t miss any of our videos.

On today’s episode, we’re discussing IR35 changes in the public sector, hosted by our co-founder, VJ. On April 6, 2021, new IR35 legislation will come into effect for the private sector to align how a contractor’s IR35 status is determined with the public sector. When these changes take effect, the responsibility for determining a contractor’s IR35 status and paying relevant tax will shift to the companies engaging them. This webinar aims to clarify these changes in detail and provide guidance to contractors.

Webinar Overview

Thank you all for joining! As Gemma mentioned, this webinar focuses on the IR35 rules effective from 2021. This was supposed to happen last year but was postponed due to COVID, so this serves as a refresher from a similar webinar we held last year.

About WIS

We founded WIS in 2009, and we’re regulated by CIMA and ACCA. We’ve expanded into mortgages, wealth management, and umbrella services to cater to all your financial needs under one group.

About VJ

I’m VJ, co-founder of WIS with my friends Ithaca and Sunette. I qualified as a chartered certified accountant in 2008 and am available on LinkedIn. My clients have my email and mobile number, so feel free to contact me with any questions following this webinar.

Webinar Agenda

We have a lot to cover today:

• Differences between employed, self-employed, and contractors via limited companies
• Overview of IR35 and changes from 2021
• What clients do to determine IR35 status
• Factors considered for IR35
• Options available if caught inside IR35
• What you can do now
• Take-home pay using an umbrella company
• FAQs and additional questions

Employment Types and Their Differences

Employed

• Definition: Work under an employment contract with regular pay, employment rights, and company perks (e.g., health insurance, car benefits).
• Benefits: Clear career progression, appraisals, holiday pay, and furlough pay (up to £2,500 during COVID). Taxes are deducted at source, so no admin work for HMRC filings.
• Drawbacks: Less flexibility, higher taxes compared to contractors, workplace politics, and a boss-servant relationship. Expenses cannot be deducted from net salary.
• Examples: Doctors, nurses.

Self-Employed

• Definition: Work on your own account without a limited company (e.g., window cleaners, plumbers).
• Benefits: Flexible working, no politics, unlimited holidays, tax advantages, and deductible business expenses.
• Drawbacks: Risky, no employment rights or perks, limited career progression, more admin work, and potential loneliness. Losses are not limited, and you file a self-assessment return with a self-employed section.
• Tax Implications: Pay National Insurance on profits (lower than employed) but similar income tax.

Limited Company Contractor

• Definition: Operate through a limited company, limiting personal liability to company assets or insurance.
• Benefits: Similar to self-employed (flexibility, tax advantages) but with limited liability.
• Drawbacks: Significant admin work (company tax returns, VAT, personal returns). Examples include IT contractors.
• Tax Comparison (Example for £50,000 income):
  • Employed: Net income ~£37,642 (after income tax and employee National Insurance; no expense deductions).
  • Self-Employed: Net income ~£38,696 (lower National Insurance; expenses deductible but excluded for comparison).
  • Limited Company Contractor: Net income ~£39,994 (corporation tax and dividend tax; expenses deductible but excluded for comparison).

Why IR35 Exists

Limited company contractors pay less tax than employees, prompting HMRC to introduce IR35 (Inland Revenue 35) in 2000. Also known as disguised employment or off-payroll working rules, IR35 is anti-avoidance legislation to prevent individuals from leaving permanent jobs on Friday and returning as contractors on Monday, ensuring correct tax payment.

IR35 Changes from April 2021

Currently, contractors and their personal service companies (PSCs) determine IR35 status. From April 2021, this responsibility shifts to the client and recruitment agent (if applicable). Exceptions apply to small companies (turnover < £10.2M, balance sheet < £5.1M, or < 50 employees), where old rules remain.

Client Responsibilities

• Blanket Bans: Some financial institutions are banning PSC contractors to avoid risk.
• Status Determination Statement (SDS): Clients must determine if a role is inside or outside IR35 using HMRC’s Check Employment Status for Tax (CEST) tool or external tools (e.g., Qdos, IR35 Shield, PwC). External tools are preferred as they offer insurance-backed results, unlike CEST.
• Outside IR35: Clients take responsibility for HMRC investigations.
• Inside IR35: Taxes are deducted at source like a permanent employee.
• Appeals: Contractors can appeal an SDS within 45 days, especially if assessed inside IR35. Clients must confirm or revise the determination with reasons.

IR35 Tests and Factors

To determine IR35 status, three primary factors are considered:

1. Personal Service: Check for a substitution clause (ability to send a substitute if unavailable).
2. Control: Contractors should control how, where, and when they work, leveraging their skills and experience.
3. Mutuality of Obligation (MOO): Unlike employees, contractors are not obliged to accept additional work, can negotiate extra costs, and have the right to terminate agreements.

Secondary Factors

• Equipment: Using your own vs. client’s equipment.
• Insurance: Holding business insurance (e.g., professional indemnity, public liability).
• Payment Basis: Paid after work completion or in advance.
• Length of Engagement: Shorter engagements reduce the risk of being “part and parcel” of the organization.
• Part and Parcel: Avoid involvement in staff training or appraisals.
• Intention of Parties: Contractors deliver a project and move on, unlike employees.
• Risk: Contractors bear the risk of non-payment.
• Profit Opportunity: Ability to take on multiple contracts for revenue.

CEST Tool Limitations

HMRC’s CEST tool ignores MOO, potentially leading to inaccurate inside IR35 determinations. External tools include MOO and are backed by insurance, making them more reliable. HMRC recently lost a case due to MOO, so challenge inside IR35 determinations via CEST.

Options if Caught Inside IR35 (Post-April 2021)

1. Permanent Employment: Join the client or another employer.
2. Deemed Payment: Receive payment through your limited company (admin-intensive, not recommended).
3. Umbrella Company: Handles admin and insurance, deducting taxes at source.
4. PAYE/Zero-Hour Contract: Work through a recruitment agent.

What Contractors Can Do Now

• Engage with Clients/Recruiters: Ask about their post-April 2021 intentions.
• Challenge Determinations: If assessed inside IR35, appeal within 45 days.
• Monitor Budget (March 3, 2021): Unlikely to delay IR35 changes, but stay informed.
• Evaluate Limited Company: Decide whether to keep it dormant, liquidate, or invest if moving to an umbrella company. WIS can provide umbrella company details.
• Recent Trends: Some contracts are being assessed as outside IR35 with external tools, offering hope.

Take-Home Pay with an Umbrella Company

Using an example of £300/day for 21.67 days:

• Gross Income: £6,501
• Deductions: Margin, employer’s NI, apprentice levy
• Gross Salary: £5,723
• Net Salary: After income tax and employee’s NI (assuming 1250L tax code, no pension contributions, or salary sacrifice schemes).

Contact WIS for personalized illustrations based on your daily rate.

How WIS Umbrella Works

• Employment Relationship: Sign an overarching employment contract. The umbrella invoices the client/recruiter, handles deductions, and pays your net salary.
• Compliance: Fully compliant with HMRC, no offshore structures or loans.
• Employee Rights: Includes SMP, SSP, and insurance (PI, public liability, employer’s liability).
• Payment: Same-day payments if the client pays promptly.
• FCSA Regulation: WIS is not currently FCSA-regulated but partners with FCSA-regulated companies if required.

Frequently Asked Questions (FAQs)

Is it risky to remain in the same role inside IR35 post-April 2021?

Yes, it’s risky, though HMRC claims no retrospective challenges and a light-touch approach for 2021. Ideally, change the role to mitigate risk, but if unavoidable, be aware of potential issues.

Can I form a consultancy company with friends to provide services?

Under MSC (Managed Service Company) regulations, this is discouraged as HMRC may treat income as salaried, not dividends, to prevent tax avoidance.

Do Statements of Work (SOWs) mitigate IR35 risk?

SOWs (outcome-based contracts) are beneficial but not sufficient alone. The contract and working arrangements must align with outside IR35 criteria. Recent outside IR35 contracts often include SOWs.

What to do with a limited company if inside IR35?

Options include liquidation, keeping it dormant, or investing. Entrepreneurs’ Relief (Business Asset Disposal Relief) may apply if liquidating, but check post-budget (March 3, 2021) availability. Liquidation is beneficial if dividends exceed £35,000; otherwise, closing is simpler.

Closing vs. Liquidating a Company

• Closing (Strike Off): For dividends < £25,000, done directly without a liquidator.
• Liquidation (Members’ Voluntary Liquidation): For dividends > £25,000, involves a liquidator and a formal process with HMRC.

IR35 Insurance for Clients

External tools provide insurance for clients against HMRC investigations, not contractors. From April 2021, clients bear investigation risks for outside IR35 determinations.

Contracts Extending Past April 6, 2021

Secure an SDS now if your contract extends beyond April 6. Don’t wait, as post-April responsibility lies with the client/recruiter.

Substitution Clause Challenges

A substitution clause is critical for outside IR35 status. The contract should allow you to propose a substitute, even if the client can reject them. Ensure the clause covers your responsibility to fix errors and pay the substitute.

Short-Term Contracts and Limited Companies

Limited companies must file accounts for a full year, even for short-term contracts (e.g., 4 months). Dormancy is an option after a year if no further contracts are secured.

Deemed Payment for Husband-and-Wife Companies

No advantage, as only the main employee’s salary is deductible. Mixing inside and outside IR35 income is complex, requiring separate accounting. Dividends can be paid based on shareholding (e.g., 50/50), but inside IR35 income is treated as employment income with payroll.

Tax Reclaims for Inside IR35 Contracts

If you pay more tax inside IR35 (e.g., April to December) and have no income later, file a self-assessment return to reclaim overpaid tax, as payroll assumes consistent annual earnings.

Umbrella vs. PAYE

No tax difference between umbrella and PAYE/zero-hour contracts. Umbrellas deduct employer’s NI, which HMRC allows if clearly documented. Clients may increase rates to compensate.

Rate Increases for Inside IR35

A ~30% rate increase is needed to match outside IR35 take-home pay, assuming all money is withdrawn from the limited company (including 32.5% dividend tax).

Overseas Clients

If working for an overseas client via a UK recruiter, the recruiter provides the SDS. For direct overseas engagements, the contractor is responsible for IR35 status, as currently. Ensure contracts and working arrangements align with outside IR35.

IR35 Protection Insurance

HMRC can challenge up to 6 years (or 20 in rare cases). Insurance may cover risks, but liquidated companies limit personal liability. Weigh the cost of maintaining insurance for 6 years vs. potential HMRC challenges.

Closing Remarks

Thank you for joining and for your patience! I tend to speak quickly, but I’m glad we covered all the slides. Connect with me on LinkedIn or via email for further questions. We’ll share these slides and host another webinar on March 26. We’re also planning budget webinars, as the March 3 budget will be significant post-Brexit and amid the pandemic. Sign up via the same link if interested.

If you have questions, email us or join our budget webinars. Thank you again, and have a great day!