How will upcoming changes to off-payroll in the private sector (IR35) impact limited company contractors?

Having been delayed for 12 months in response to the coronavirus pandemic, changes to off-payroll in the private sector (IR35) will be coming into effect in April 2021. This doesn’t mean the end of contracting through a limited company in the private sector. However, it does mean that contractors with a personal service company (PSC) will no longer be able to determine their IR35 status. Instead, it’ll become the end-clients responsibility (if they’re classified as a medium or large sized organisation). Keep reading and find out more about how the upcoming changes to off-payroll in the private sector (IR35) will impact limited company contractors.

A short background to the legislation

IR35 has been around for what seems an eternity. The legislation was first introduced in 2000 as a way of HMRC stopping “disguised employees” taking advantages of tax breaks that were not meant for them. Contractors and freelancers who were deemed to be working in the same way as permanent employees would be considered inside IR35, and genuine self-employed workers outside IR35.

Being outside IR35 allows limited company contractors to pay themselves with a combination of dividends and salary – the most tax-efficient way to operate as a self-employed worker.

Before April 2017, it was always the temporary workers’ decision as to whether or not they were inside IR35. And, this meant they were able to pay themselves accordingly. However, this was changed in the public sector in 2017, and new rules (off-payroll in the public sector were introduced). As a result, deciding a workers’ IR35 status became the responsibility of the public sector organisation.

Now, very similar rules are coming into effect in April 2021 for the private sector, and contractors with a limited company will no longer be able to determine their IR35 status. Instead, the government confirmed “medium and large-sized private sector clients will be responsible for deciding if the rules apply”.

The changes to IR35 in the private sector faced much opposition

The upcoming changes to off-payroll in the private sector have faced criticism for a magnitude of stakeholders, including self-employed workers, staffing agencies, MP’s, large corporations and payroll providers.

Stop the Off-Payroll Tax, a campaign lead by Dave Chaplin, CEO at ContractorCalculator, came to a close last year. Despite only getting the attention of 13 out of the 40 MPs needed to swing the Amendment 20 vote, the campaign was a positive step in raising awareness of the disputed legislation.

In a statement, Stop the Off-Payroll Tax confirmed they had “worked tirelessly over the last four years to raise awareness of this issue and to get MPs to realise just how damaging it will be to the flexible workforce. It might feel that we have not achieved all that we hoped for, but eliciting a vote in Parliament on this matter was a huge achievement, especially since Labour had not been clear in supporting previously.”

The Freelancer and Contractor Services Association (FCSA), a leading professional body representing temporary workers, expressed their concern with the upcoming changes and questioned the government’s agenda. A spokesperson said:

“In recent years, we have seen HMRC push ahead many times with their own agenda for fundamentally flawed legislation and with arrogant disregard for compelling evidence of the damage that will result.  However, there are two further opportunities for the 2020 Finance Bill to be influenced and the supportive MPs will use these to the best of their abilities.”

On the upcoming changes, Ciaran Woodcock, Head of Field Sales and Marketing at Churchill Knight & Associates Ltd, said:

“IR35 has been scrutinised since it was introduced, and it’s no surprise. I completely understand the government’s efforts to ensure the temporary workforce pay their fair share of tax and national insurance. However, as we saw when the off-payroll changes came into the public sector in 2017 – genuine contractors and freelancers suffered due to a lack of understanding and knowledge within the supply chain.

If every organisation engaging with temporary workers had dependable IR35 procedures in place, there would be nothing to worry about. For example, if all businesses had IR35 friendly contracts in place and an accurate way of making IR35 assessments for each assignment – contractors would be treated fairly. Unfortunately, this isn’t the case. I’ve come across some businesses with marvellous IR35 management solutions in place. However, I’ve also come across some that show no signs of being prepared, and it’s frustrating to say the least.”

This is not the end of contracting through a limited company

Private sector organisations should already have reliable IR35 procedures in place, and the concept of contracting through a limited company is not coming to an end. Not only are temporary workers critical to the success of thousands of multinational corporations, but it’s also in the clients’ interests to have assignments that are specifically outside IR35 – so that they can continue to attract highly skilled contractors as and when they’re required. And let us not forget – businesses in the private sector have had an extra year to prepare themselves for the changes to off-payroll legislation – seeing as they were initially scheduled for April last year (2020).

After April 2021, when you work on a temporary assignment, you should be issued with a Status Determination Statement (SDS) – an official document created by your client that explains why they have come to the IR35 assessment they have.

Why are contractors likely to be encouraged to use an umbrella company?

If you’re inside IR35, you’re unable to pay yourself with a combination of salary and dividends. Instead, you’ll be taxed in a very similar way to a permanent employee, your take home pay retention will be lower compared to being outside IR35.

When the public sector changes came into effect in 2017, umbrella companies were in high-demand. A majority of contractors inside IR35 were advised by their client or agency that using an umbrella company was the best option for their payroll – and this was sound advice. However, while umbrella companies provide a compliant and efficient way for contractors inside IR35 to be paid (PAYE), pay retention is noticeably lower than contracting outside IR35 through a PSC. While this may come as a shock to long-term PSC contractors, it’s not the umbrella company’s fault.

Each week, Churchill Knight Umbrella processes the payroll (PAYE) of thousands of contractors and freelancers who are working in both the public and private sectors. When you join us, you become an employee of ours and can access a host of benefits. These include free insurance, Employee Benefits (including Sick Pay and Maternity/Paternity Pay), Same Day Faster Payments, and more. Plus, if you are new to the concept of operating inside IR35, switching between an umbrella company and your PSC (for assignments that are outside IR35) is a realistic solution, and a popular one amongst our clients. For more information on Churchill Knight Umbrella, please click here.

Support for Churchill Knight clients working in the private sector

Account Manager for unlimited support

Your Account Manager is on hand to answer any questions you have about the upcoming changes in legislation, and to discuss your circumstances if you’re unsure what your best course of action is. You may decide that it’ll be beneficial for your Account Manager to contact your end-client on your behalf – and this is something they’d be delighted to arrange. Please give them an email or call at your earliest convenience.

PAYE umbrella – if you need it

Churchill Knight sincerely hopes that all of our limited company clients can continue to work outside IR35 in the private sector. However, if you find that you require an umbrella company’s services at any point, please do not hesitate to contact your Account Manager. Switching between your limited company and our umbrella payroll is remarkably easy and cost-effective, and we’re here to support you through every step of your contracting journey.

IR35 assistance

From April, it will be the responsibly of your end-client to determine your IR35 status. Providing your client takes this responsibility seriously and has reliable procedures in place; you have absolutely nothing to worry about. However, if you are interested in having an independent specialist review your contracts, we would be delighted to put you in contact with our IR35 partners – Kingsbridge.

Every Churchill Knight client is eligible for special discounts when you use any of Kingsbridge’s IR35 services, and taking advantage of this offer may give you the peace of mind you need to move forward with your contracting career. Kingsbridge also offers a market-leading, Zurich underwritten IR35 insurance policy that protects the whole supply chain for up to £100k legal defence costs and £100k tax liability, as well as providing a legal expenses policy. This will cover you if HMRC investigates your client and decides you have been wrongly assessed and have an outstanding tax liability.

For more information about IR35 assessments and IR35 protection insurance, please contact your Account Manager.