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Why Contractors Need To Prepare for IR35

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Joanna Jewitt IR35, Contract

In preparation for the change in legislation with the IR35 legislation in April 2020, we’ve been speaking to a number of our partners who are experts in this field.

We recently met up with Jeff Blakemore from Fore Two Group to get the low down on what it means for contractors, and how they should be preparing. Read our interview here;

 

  1. Please describe in your own words, what is IR35?

IR35 is a piece of tax legislation designed to stop tax avoidance by workers operating via an intermediary such as a limited company, and were it not for the intermediary, the worker would be an employee and taxed accordingly.

The legislation looks to establish the relationship between worker and the hirer and aims to seek out whether the worker is a disguised employee or operating as a genuine business.
 

  1. What does it mean for contractors?

    Ultimately, the legislation determines how income is taken out of the limited company. If you are deemed to be ‘outside IR35’ or ‘not-caught’ it simply means you may pay yourself via a mix of salary, dividends and expenses. 

    If you are deemed ‘inside IR35’ or ‘caught’, from a tax perspective you’re considered an employee and therefore subject to PAYE.

    In respect of the upcoming reforms to IR35 in the Private Sector, the main changing point is who determines the status and where the liability may sit in the supply chain. At present, the worker is responsible for determining the status. From April 2020, it will be the engager (or end client) who is responsible for determining the status. It’s likely we will see roles being advertised as ‘inside’ or ‘outside’, similar to what we have seen in the Public Sector since similar reforms were introduced there in April 2017.  

     
  2. How should contractors prepare?

It’s worth bearing in mind that if the client falls under the small company definition as per the Companies Act 2006, there will be no change to how the assessment is applied i.e. the contractor will still be responsible for determining their status. Only medium and large companies will be responsible for status determination from April 2020.

At this stage I would suggest contractors check whether the client falls within the small company definition (two of the following must be met: annual turnover of £10.2M or less, gross assets of £5.1M or less and an average of 50 employee or less).

If the company is a medium or large company, contractors should engage with the client to get an understanding what the client’s approach is likely to be and how they intend to assess the role.

Contractors should Ensure their current contract has been reviewed by a specialist contractor accountant; if it hasn’t, get one done.

Also, they should think about their current working practices – could they indicate disguised employment?

For example: Do they have line management responsibilities of company employees? Do they have a client company email address and business cards?

They should also Establish whether the client would be amenable to reviewing and if necessary, make small tweaks to contracts and working practices.

Contractors should remember that until the reform takes place in April 2020, they are still responsible for determining their IR35 status, so keep up to date with IR35 reviews for any new assignments they may be starting between now and then... 

And don’t panic.

 

Orbis are hosting an IR35 event featuring experts within this field and partnering with Fore Two Group - Umbrella and Contractor Accountants & Kingsbridge - Insurance cover for contractors and freelancers.

If you are interested in attending please register here;

Eventbrite: https://www.eventbrite.co.uk/e/ir35-what-you-need-to-know-registration-77906326921?aff=website

Meetup: https://www.meetup.com/OrbisConnect/events/265742658/

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