Self-employed alert: How freelancers & contractors may be able to avoid IR35 tax changes

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IR35 tax changes were introduced on April 6 and going forward, companies will be required to treat off-payroll workers as full-time employees, mirroring a system that has been in place in the public sector since 2017. Many fear this will raise costs across the board and limit contractor usage but some self-employed workers may be able to sidestep some of this damage.

Dan Stopp, a UK Accounting Manager at Bokio, broke down what the new rules mean: “In short, IR35 is an anti-avoidance tax legislation designed to close a loophole in the tax system where workers could exploit the setup of a limited company structure to avoid paying employment taxes.

“Essentially, it was brought in to ensure contractors doing work for companies are paying the same level of Income Tax and National Insurance Contributions as normal employees, and the firms that hire them are also paying additional tax contributions to HMRC.

“Whereas from 2017, IR35 applied predominantly to contractors in the public sector, the changes that have come into effect this week have extended these rules to the private sector, affecting an estimated 170,000 additional contractors.

“This means that many more self-employed workers across the UK – and the businesses that hire them – will now have to pay tax differently.”

While many experts and industries within the field worried about the new rules, Dan went on to confirm that many self-employed workers may not even be hit by them: “So, whether you are self-employed or a business owner, it’s vital you take time to understand the new IR35 rules and exactly who is affected by them because the chances are, you may not be.

“In general, if you, as self-employed, carry out work for a fixed fee, are paid at the end of a project, generally work for a number of different clients, and have control over how, when and where you work, the new IR35 changes may not apply to you.

“The best way to find out is via the HMRC website, and its CEST tool, which assesses whether you should be classed as ‘employed’ or ‘self-employed.’

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“If you are still uncertain about whether or not your employment status is deemed to fall within IR35, you may not have to worry about non-compliance and hefty fines just yet, as HMRC have said they will implement a ‘light touch’ approach during the first year of roll-out, meaning that no penalties will be placed on anyone with inaccuracies relating to the IR35 rules.

“Make sure you use this time to properly get your head round these new tax changes, and whether or not they affect you.”

Additionally, self-employed workers and contractors who work for relatively small firms are unlikely to be affected as Joanne Harris, a Technical Commercial Manager at SJD Accountancy, explained: “The biggest change for medium-large businesses is that the responsibility for determining the IR35 status of any contractor working for the company now sits with them.

“They will also need to issue what’s known as a Status Determination Statement to show this, until they do, they remain liable for any unpaid tax and national insurance.

“Businesses must work compliantly with the IR35 changes or else could face the prospect of paying back taxes and facing penalties, although HMRC have confirmed that clients will not have to pay penalties for inaccuracies in the first 12 months relating to the off-payroll working rules, unless there’s evidence of deliberate non-compliance.

“The new rules do not apply to small businesses, which HMRC defines in the case of IR35 as those that meet two of the following criteria – turnover of no more than £10.2 million; a balance sheet total of no more than £5.1 million, or no more than 50 employees.

“For engagements with small companies the responsibility for assessing the IR35 status of an assignment will remain with the contractor.

“There are some companies that have already announced blanket bans on working with contractors or freelancers providing their services through their own limited company.

“This is completely unnecessary and these businesses risk losing valuable contingent workers.

“The best approach is for all businesses to make sure they are prepared and are able to assess the IR35 status of assignments fairly, which will mean they can continue to engage with skilled contractors and freelancers.

“We would urge any companies considering a blanket ban to seriously think again.”

Full details on the new IR35 rules can be found on the Government’s website

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