There’s no doubt about it; the nature of the labour market in the UK has continued to evolve at an incredible pace since the great recession more than 10 years ago.
More specifically, we’ve seen an exponential rise in the number of active freelancers during this time, with this growing demographic now a key driver of the UK economy.
In 2018, for example, we saw a 31% annual rise in the number of people looking to go freelance in the UK, whilst this figure is likely to increase further in the near-term at least.
However, whilst the idea of contracting may be appealing in the current economic climate, it’s crucial that you do your homework and understand your tax liabilities before making such a significant career switch. In this article, we’ll look at the IR35 set of tax rules for contractors, and how they’re set to change in April 2020.
What Does the Term ‘IR35’ Refer to?
In simple terms, IR35 is the short name used for so-called intermediaries legislation, which features a set of tax roles that apply to contractors throughout the UK.
In fact, IR35 rules apply to anyone who works for a client through an intermediary, which in the case of freelancers usually takes the form of either a limited company or a sole trader.
This set of rules was introduced to close a loophole in the existing tax system, which enables contractors to leverage the set up of a limited company structure to pay less tax.
It achieved this by introducing the concept of the ‘deemed employee’, which is used to describe to contractors who enjoy a more traditional employer-employee relationship. In this instance, freelancers will be taxed as a regular employee, creating a scenario where they may ultimately pay approximately 25% more tax per annum.
The legislation was rolled out in 2000, and contractors who are found to have been filing as a limited company despite working in a way that reflects permanent employment will ultimately have to pay the requisite amount of back-tax to HMRC.
What’s Set to Change in 2020 and Why Should You Care?
Ultimately, the key is to understand IR35 tax rules and structure your service in a way that minimises your tax burden in a legal and compliant manner.
With this in mind, it’s important to understand the proposed changes to the IR35 legislation, which are scheduled to coincide with the new financial year in April 2020.
In short, HMRC is extending the IR35 regulations to tackle what it describes as ‘disguised employment’ and associated tax avoidance with greater tenacity.
More specifically, new ‘off-payroll’ rules will be implemented in the private sector next year, with the biggest change seeing clients being made responsible for determining the IR35 status of their contractors.
So, where a contractor is deemed to be inside the boundaries of IR35, the client must deduct the employees’ national insurance and income tax from their pay (rather than freelancers being required to determine their own status and declare this to HRMC).
Under the new regulations, small business clients will be exempted, meaning that the IR35 legislation will only impact on freelancers who work for medium or large commercial ventures.
For clarity, HMRC defines small businesses as entities that do not exceed two or more of the following criteria; an annual turnover in excess of £10.2 million, a balance sheet worth more than £5.1 million or a workforce with more than 50 employees.
The Last Word
In the short-term, this legislative shift may not be good news for contractors. After all, the tools and information required for clients to make informed decisions pertaining to contractors are commonly described as inadequate, causing some firms to err on the side of caution and automatically place freelancers inside the IR35 criteria.
This will most likely increase the number of contractors caught within the IR35 legislation, whilst removing their autonomy to take control of their own taxation liabilities.
However, we’d recommend that you take the opportunity to review your contracts and the precise terms of your employment as a contractor, whilst collecting evidence to sustain your status as an independent worker.
This can include everything from a unique email signature to instances where you’re treated differently from permanent members of staff. This can help to encourage employers to provide you with the correct status, whilst creating a body of evidence that can be used to appeal any questionable decisions.