Yesterday (Monday 29th October) saw Chancellor Philip Hammond deliver his 2018 Budget and in doing so served up higher Tax and National Insurance contributions from April 2020 for contractors working for private firms.
The rules – more commonly known as IR35 already apply to the public sector, but the latest changes are designed to hit those who are considered by HMRC to be employees working for private firms and who have previously paid a lower rate of Tax and NI under self-employed status.
The Treasury has insisted that the ‘genuinely self- employed’ will not be affected but for those who are in the contractor market it’s set to be a pain in the pocket as individuals face paying a higher rate of tax and NI, whilst the private firms which use them will be responsible for checking their contractor status and paying fines if they get it wrong.
What are the key points for contractors?
- For IR35 to apply an individual must be working through their own company for another business. This is generally the case for the majority of contractors who work through their own limited companies.
- For the rules to apply an individual must be deemed to be an employee by HRMC.
- Whether someone is classed as an employee or not rests on a number of factors including hours of work, whether the firm controls what they do and how they do it, or if the firm provide equipment.
- If classified as an employee for tax purposes, a contractor would have to pay income tax, and NI at 12% on the money paid for their work.
- The private company contractors ‘work for’ will be responsible for ensuring their employment status is correct and paying NI for the first time under the rules.
- The change will not apply for the smallest 1.5 million businesses or for those individuals which HMRC deems to be ‘genuinely self-employed’
What happens next?
The move to extend IR35 to apply to the private sector won’t take effect until 6th April 2020 but it will undoubtedly mean that millions of contractors will pay far more tax on their earnings whilst large private sector businesses will surely reconsider the viability of using contractors as the responsibility for operating the rules shifts from individuals to the organisation.
For those in traditional contract roles, the changes may represent a shift to more freelance or independent work in order to avoid higher rates of tax and NI and to ensure they fit the ‘self- employed status’ as decreed by HMRC.
What is not certain is how the implementation will take place and further consultation on the detailed operation of the reform will be published in coming months, this consultation will inform the draft Finance Bill legislation which is expected in Summer 2019.
For more information visit www.gov.uk
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The contents of this article are for general information purposes and do not constitute legal, employment or tax advice in any form. Specialist advice regarding IR35 and employment status should always be taken in relation to specific circumstances.