Many contractors are worried about new legislation changes from the UK Government which could see those working in contract roles pay 25% more tax.
The ‘off-payroll working rules’ legislation was originally introduced by HM Revenue and Customs (HMRC) in 2000 with the purpose of collecting income tax and national insurance from contractor and consultant workers providing their services via their own Personal Services Company (PSC).
This is because working via a personal services company can enable contractors to be taxed as a business rather than as an employee: the legislation aims to identify those personal services company contractors, who, were it not for the existence of their own limited company would be more like an employee of the end client. These contractors will be taxed as an employee rather than as a business, and they will be determined as ‘inside of IR35’. This change will come into effect on 6th April 2020.
From April 2020, any workers who do not meet the criteria for ‘self-employed’ will fall inside of IR35.
Contractors whose status changes from outside to inside IR35 will from then on be taxed as a self-employed individual.
With the extension of the legislation to the private sector, contract/freelance workers who are determined to be inside of IR35 will pay up to 25% more tax annually, without receiving tax benefits or employment rights. HMRC estimates it will recover £1.3billion additional tax from contractors by 2025.
If businesses fail to comply with the legislation, they could receive extensive financial penalties. The legal changes could discourage companies from hiring contractors in some positions and cause delays to projects. Requirements for new and existing contractor roles could change in order to ensure the employer is compliant with the rule change.
Most non-UK born contractors who work outside the UK will not be affected. The IR35 legislation changes exclude wholly overseas companies with no UK presence. This means the existing rules will continue to apply to assignments where the client company is wholly outside the UK, and the individual’s limited company will continue to determine the status of the individual.
All UK businesses will need to complete a Status Determination Statement for each of their contractor workers. When complete, this SDS will be shared with each contractor to confirm the determination of their IR35 status. All contractors will need to be determined as either ‘Inside’ or ‘Outside’ of IR35.
The following ways of working and circumstances may lead to an ‘Inside’ determination for contractors:
· Your employer is obliged to pay wages for all hours worked
· Your employer directs and supervises your work
· Your employer chooses who will replace you in your role if necessary
· Your employer gives you instructions, for example how to complete tasks, dealing with customers, working time and break times, recognisability through company brand clothing and logos
· The contractor does not typically work simultaneously for different clients.
· You receive sick pay and paid holiday allowances
· You are not financially responsible for poor performance or liable for damage
· Your employer provides tools, equipment and materials.
The following ways of working and circumstances may lead to an ‘Outside’ determination for contractors:
• Your relationship with your employer is more of a ‘consulting services’ type of relationship rather than authoritative
• You decide your own working hours
• You don’t receive holiday or sick pay
• Your employer does not supervise you – instead you are responsible for the quality of your work
• You have a professional liability insurance policy and absorb all risk
• You use your own material, tools, software etc.
• There is a marked difference between you and other company employees who perform the same role as you, for example authority, autonomy, risk, supervision, direction etc.
• You work on multiple projects at the same time for other clients.
A contractor considered inside of the IR35 legislation would mean all income received within the relevant period is reclassified as employment income and, as a result, it is subject to PAYE, NIC, interest and penalties.
Contractors operating outside the scope of IR35 can pay themselves marginally more tax efficiently, usually through a combination of salary and dividends. End clients will pay the contractor, who will maintain responsibility for their taxes.
Last year industry body Onrec reported that the recruitment industry is reducing reliance on contract workforces and shifting towards permanent recruitment. The average value of permanent placements in 2018 increased by 6.4% from 2016/17, with uncertainty caused by Brexit, globalisation and compliance changes driving requirements for permanent staff members.
Contractors can transition to permanent roles at any point in their career, and with a wealth of experience in a variety of roles and companies, former contract or temporary workers will be an asset to any organisation. Contractors will be used to avoiding company politics, working to tight deadlines and adhering strictly to requirements, which ideally position them to fit right into a new workforce and provide a fresh perspective as a permanent employee.
Benefits of permanent roles include:
· Less Admin – Your employer will deduct tax and National Insurance contributions from you, eliminating the need for you to do your own taxes and removing risk of non-compliance.
· Job Security – Without the pressure of looking for work every few weeks or months, permanent staff are reassured of continuous income and job security.
· Sick Pay – You won’t lose out on your day rate in the event of mild to serious illnesses, and will qualify for Statutory Sick Pay for up to 28 weeks (usually £94.25 per week, after 4 days of continuous illness) which is paid by your employer.
· Holiday Pay – Statutory holiday amount is 28 days’ per year (including bank holidays) and many organisations extend this as an employee benefit or increase entitlement with years’ service.
· Reduced Risk – Your employer will absorb risk of damage to company property, tools and equipment etc.
· Weather Economic Drips – Permanent positions offer consistent salaries and job security throughout recession and changes to the global and local economies. Even if made redundant, permanent workers with over 2 years’ continuous service receive redundancy pay which increases with length of service and age of the employee. Redundancy pay (including any severance pay) under £30,000 is not taxable.
The law changes only apply to work completed inside the UK; companies are only required to adhere to the legislation if any work is carried out for them in the UK, or if they have a UK entity as part of their group. Moving abroad would make the legislation changes irrelevant for the majority of those who do not work in the UK, allowing contractors to avoid risk and financial penalties completely.
Benefits of moving abroad include:
· Quality of Life – With the UK at number 17 on the Quality of Life index, other countries such as the USA (#13 on the list), Iceland (#7) and Denmark (#1) are ideal options for further improving your working and home life. Sunnier climates in southern Europe, the Middle East and Australasia enable residents to spend much more time outside relaxing and pursuing sports and hobbies.
· Increased Earnings – Many employers will pay higher salaries for expats who have a wealth of outside knowledge and experiences, and a number of countries such as the UAE require low taxes or do not charge workers any income tax.
· Travel Opportunities – Those who live in mainland Europe are much closer to other European countries such as France, Germany, Italy and Austria as well as Scandinavia, and from Eastern Europe can explore the fascinating diversity of Russia. European residents also benefit from shorter journeys to African countries including Morocco, which has a wealth of history and culture, and those working in the UAE are only two hours’ away from the beautiful and legendary India. Australian migrants and expats can explore a completely new side to the world such as New Zealand’s Great Barrier Reef, Singapore’s tropical cities and Indonesia’s 17,000 islands.
Some large companies have committed to work with contractors through an umbrella company: a PAYE, standard UK limited company, operated by a third-party acting as an ‘employer’ on behalf of contractors. Operating under an umbrella company would mean your employer would pay the umbrella company directly, who would then pay your salary and deduct income tax and National Insurance.
Although umbrella companies do charge a fee for their services, this option removes compliance risk and can enable workers to continue working on current and future projects in much the same way as they have done previously.
Recruitment agencies that specialise in temporary or contract work will have been well prepared for the legislation changes since 2019. Their consultants will be able to provide guidance on your options, potential advice tailored your career history and situation and direct you to compliant umbrella companies should you need.
Recruitment companies are working with workers and employers to mitigate the financial losses for contractors and businesses. Recruiters may be able to help you negotiate with businesses to see if your company can absorb part or all of the tax increases, or find other solutions to ensure you and your employers remain compliant.
In preparation for these changes, VHR’s global technical recruitment team have formed an IR35 working group to review the impact to our clients of these legislative changes. This VHR working group has assessed this impact and now wishes to engage with you to ensure the appropriate response and compliance with this legislation.
You can find more information here.
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