I have been an independent consultant since May 2017 and have worked for two large wealth management firms during this time. I raise invoices through my own company, charging a daily rate. I have now been in my most recent position since the beginning of 2018, but I’m concerned by the government’s plans for “off-payroll working rules” in draft finance bill legislation, which I understand will be introduced in April 2020. How will this affect my position?
Stephanie Wilson, partner at accountancy and advisory firm BDO, says you should first consider getting independent tax advice on whether the “IR35” tax legislation applies to you, your company and certain engagements. If IR35 does apply, then questions may arise about whether the company is the most efficient structure to operate from a commercial perspective. You may also want to seek separate legal advice about your status as a worker and the rights and responsibilities that come with that.
From April 2020, medium-sized and large businesses must assess every supply of services or consulting contract they sign with personal service companies (PSCs). This is to establish whether the worker should be regarded as a “deemed employee”.
Where deemed employment exists, the end user must deduct PAYE and national insurance contributions (NICs) from payments made to the PSC or agency. Within 31 days, it must also inform both the party it is engaging with, and the worker, of its decision about deemed employment. The worker has a right of appeal if they do not agree with the determination and, on appeal, the end user must respond within 45 days stating why it believes deemed employment exists or that it has changed the determination. There is no specified process for such appeals but it is clear that HM Revenue & Customs will not get involved.
If your only consulting work was for the two large firms, HMRC may dispute your status of “independent consultant” by arguing that the work was delivered under fixed term employments. If you have already self-assessed that you fall within IR35 and made the appropriate payments of tax and NICs to HMRC, the fact that the companies that engage you will have the legal responsibility for such assessments from next April may make little difference.
Depending on the number and pattern of your consulting engagements — for example the level of autonomy you have over the work and the way you carry it out — then it is possible you are currently outside IR35. From April 2020, your engager may decide it should be paying you net, but you could appeal against this. If it sticks with its decision, this will only affect that one contract, and it is possible that you may continue to be outside IR35 for your other contracts.
HMRC’s fact sheet about the new rules states: “HMRC will not carry out targeted campaigns into previous years when individuals start paying employment taxes under IR35 for the first time. Organisations’ decisions about whether workers are within the rules will not automatically trigger an inquiry into earlier years.”
However, some teams within HMRC have been very active on IR35 cases recently, so how strong a guarantee this is for individuals who have failed to apply IR35 correctly remains to be seen. If you fall into this category, I would advise putting things right voluntarily now. This is always the wisest option to limit interest and penalties on outstanding tax.
Claire Christy, a partner in the employment law team at Withers, says individuals choose to be independent contractors for many reasons, including more flexible working arrangements, control over income and preferable tax treatment, since individuals providing services through a personal service company (a PSC) generally pay themselves in dividends rather than salary.
The IR35 rules were brought into force to tackle the loss of such tax revenues by looking at the relationship between the individual and the business they contract with. Currently, if the PSC is taken out of the equation, and the true relationship is judged to be one of employment, the PSC is liable for tax and NICs.
The new off-payroll working rules shift liability away from the PSC on to the hiring party. If you are complying with the existing IR35 rules, and continue to comply with them, your remuneration should not be affected by these changes. You will only pay more tax and NICs if the hiring company decides to treat you as an employee for tax purposes.
From April 2020 hiring companies will be responsible for deciding if the rules apply and deducting the associated tax and NI. They will be keen to get it right and will need to evaluate the true nature of each consultancy relationship and the risk of tax and NICs being payable. Some firms may decide to take a “blanket” approach and classify all consultants as employees for tax purposes, to avoid any ambiguity and the risk of penalties. However this could end up with individuals who are genuine consultants being unfairly penalised.
We recommend you speak to the company well in advance of April 2020 so steps can be taken to clarify your status and, if necessary, renegotiate your working conditions to ensure they fall outside IR35. The length of the engagement and nature of the work you provide, your working hours and the level of control you have over your day to day work, are factors to take into account when assessing your status.
If you are confident in your consultancy status, you might consider offering an indemnity to protect the company against any liability for tax and NICs. Alternatively, offering to switch your status to an employee, working on a fixed-term contract or permanent basis with the same rights and benefits as other employees might be an option.
The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.
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