Private contractors who set up limited companies to avoid being responsible for PAYE and national insurance contributions are being warned of key changes to legislation.
From April rules around the IR35 legislation will be extended to the private sector. IR35 is ultimately intended to prevent the lower rates of tax which would otherwise apply when payments to intermediaries are regarded as “disguised employment.”
The key change is that the responsibility of defining IR35 status will switch from the individual’s limited company to the client.
Where an assignment is deemed ‘inside’ IR35, PAYE deductions must be made from the contractor’s pay. Any assignment ‘outside’ IR35 is classed as a genuine B2B service and so is not subject to the same tax treatment as employees.
But how do you decide if your company is inside or outside of IR35?
If you are an employer or a contractor you can use the HMRC’s online tool, Check for Employment Status for Tax (CEST) service to help determine if you should be classed as employed or self-employed for tax purposes.
In most cases you will get an answer because this online tool has produced a definitive response in more than 80 per cent of cases since it was introduced in November 2019. If it proves more complicated, then HMRC will likely have to be contacted directly.
Significantly, the legislation only applies to large and medium-sized companies. Where a private sector client is considered “small”, limited companies will remain responsible for deciding the contractor’s employment status and whether IR35 applies.
If an assignment is deemed to be outside IR35, then it is essential that “reasonable care” was taken in making the decision. In the event it is proven that reasonable care was not taken, then the client will be liable for the unpaid taxes.
Further guidance on reasonable care is due to be published by HMRC later this year.
Owen Kyffin, director of Whitley Stimpson, said:
“This is a significant change in the IR35 rules, and it is important that contractors are not caught out by the implications.
“There are complexities, particularly in determining whether you are inside or outside the rules and I would urge anyone with queries to contact us for guidance.”
For further information contact Owen Kyffin on 01295 270200 or email owenk@whitleystimpson.co.uk.