If you’re a contractor and haven’t yet prepared yourself for the IR35 reforms then it really is time to get going. The reforms to the off-payroll working rules, designed to weed out ‘disguised employees’ from the actual self-employed are set to come into play in April 2021 and see responsibility for IR35 status determination – you’re either inside IR35 or outside of it – shift from the contractor to the end client, and see liability for taxes and NICs shift from the contractor to the fee-payer.
The legislative reforms were due to launch in April 2020, but the Treasury made the decision to push them back by a year in response to the coronavirus pandemic. It’s the firm belief of experts that they will not be moved back again as the government will be seeking to recoup some of the money they have spent in fighting the pandemic. IR35 is one way to do this. If you’re determined to be ‘inside’ IR35 then you will be taxed at source through PAYE at the same rate as an employee (just without all the benefits). If you are declared outside IR35, but HMRC believes you are inside, you will be investigated as HMRC seek to recoup outstanding contributions.
What could losing an IR35 investigation mean for a contractor?
Right now, you still hold the tax liability in terms of IR35, so if any of your current contracts were to be investigated, you would be at risk of paying the tax bill if you lost. Losing an investigation could, in short mean having to pay out a huge bill made up of unpaid tax and NICs, interest on those contributions, penalties levelled by HMRC and, of course, your legal costs.
Looking at fairly recent cases, these amounts can be huge. For instance, the director of Northern Lights Solutions Ltd, who lost his IR35 appeal, owed an estimated £75,000 in tax. talkSPORT presenter Paul Hawksbee, meanwhile, owed an eye-watering £140,000 tax bill when he lost his case. And, of course, many of us have heard of TV presenter Lorraine Kelly’s appeal against HMRC which she won, avoiding a bill of £1.2 million. Even smaller cases have the potential to bankrupt, with Jensal Solutions, successfully defended by Andy Vessey (Kingsbridge’s Head of Tax), avoiding a bill of £26,000.
What would the ramifications be for you if you faced a bill like this? Can you afford to lose savings or assets? Or would you be forced to declare bankruptcy. Realistically, you should be protecting yourself with specialist IR35 insurance that can cover you should things not go your way in the face of an investigation.
How can I prepare my PSC for the IR35 reforms?
As the responsibility and liability is shifting away from you as the contractor, you may feel like there’s little for you to do. However, it’s actually up to you to ensure your end clients make the correct status determination – both in terms of legality and in terms of what works best for you. So, how can you prepare your end clients and fee-payers to ensure the outcome is satisfactory and free from financial risk?
- First of all, get hold of copies of all of your current contracts and check the wording. You want to make sure that they clearly signpost you as being in business on your own account and stand up to the main status tests.
- Next, take a long, critical look at your working practices. Do they align with those of a self-employed contractor? Or do they make it seem as if you’re an employee?
- If either your contract or working practices need any tweaks to ensure you’re indisputably outside IR35, bring this up with your end client, your recruiter and/or agent. You should hopefully be able to mutually agree the changes and get them in place.
- If your end client or recruiter seem a bit nonplussed about IR35, it’s time to educate them. Make sure they understand the reforms and what it means for them and you. You really want to get them onside here.
- Look at ways to protect yourself and your client financially. The best way to do this is by purchasing an IR35 insurance product that flexes to protect whoever holds the liability. This would mean it protects you for your current and past engagements, but also your fee-payer for all engagements after April 2021. A good insurance package should also give you access to independent IR35 status reviews to help ensure your status is accurate.
While all of the above preparatory steps are useful, the most important one is insurance as this is the only one that can protect your savings, your assets and even your business should you find yourself on the wrong end of a HMRC investigation. It will also remove the risk factor from you personally, making you a safer bet for clients wishing to hire you in the future.
By Kingsbridge Contractor Insurance, one of the UK’s leading providers of specialist insurance and IR35 services to the rapidly growing contingent workforce of contractors, freelancers and gig workers.