Home Finance IR35 changes: How does IR35 affect umbrella company contractors?

IR35 changes: How does IR35 affect umbrella company contractors?


This month, several contractors and companies that hire them will be affected by IR35 changes. Changes are being brought in which will see medium and large private sector businesses become responsible for deciding whether contractors fall inside or outside IR35. The move will mean more money for the Treasury, as people deemed inside IR35 will have to pay more in National Insurance contributions, as will the companies who employ the contractors.

What are the changes to IR35?

The IR35 changes were originally scheduled to come into force last year, however, the move was delayed due to the coronavirus crisis.

Ashley Coker, CEO and founder of Slate, explained to Express.co.uk: “Many contractors set up limited companies and pay themselves a basic salary, topped up by director’s dividends.

“However, HMRC took the view that, in too many cases, the limited company status was being used as an intermediary that enabled both contractors, and the organisations hiring them, to avoid paying their taxes in full.

“The April 2000 IR35 legislation, also known as the Intermediaries Legislation, was drawn up to combat tax avoidance by people who claimed to be self-employed, but who were in effect employees who were using their limited company status as a means to avoid paying their fair share of income tax and National Insurance contributions.”

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The changes to IR35 will now mean the onus is on the employer to decide the nature of the contractor’s employment status within the business they are working for.

Mr Coker added: “Previously, contractors could decide whether they were self-employed (outside IR35), or whether the nature of their contracts meant that they were effectively working as employees (inside IR35), and therefore liable to pay income tax and employer’s and employees’ National Insurance contributions.

“Under the Off-Payroll working rules, the responsibility for determining employment status will move to the large and medium-sized private sector organisations that hire contractors.

“For the time being, contractors who work for small businesses that have an annual turnover of less than £10.2 million, a total balance sheet of less than £5.1million, or fewer than 50 employees, will continue to determine their own employment status.”

“There is no statutory definition of an umbrella company but HMRC’s definition is:
‘A UK limited company which acts as an employer to a number of individuals meeting PAYE and other requirements, where operating legitimately. It signs contracts to provide the individual’s labour to engagers, either directly or through another intermediary such as a recruitment agency.’

“Workers operating through an umbrella company, therefore, abandon their PSC, either temporarily or permanently, in favour of being employed by the umbrella.

“A contractor may choose this option for any number of reasons, e.g their contract is ‘inside’ IR35, less hassle than running their own company or they have been forced down this route by engagers/agencies refusing to hire PSC’s because of risk aversion to the off-payroll working rules.

“Many engagers don’t want to absorb the fixed costs and obligations of an employer and turn to a temporary, flexible workforce instead. Umbrella companies support such a flexible workforce by taking on responsibility for these costs and obligations.

“Because PAYE tax and NIC is already being deducted from a contractor’s pay, for this reason, umbrella’s sit outside the IR35 regime.”

Mr Vessey added agencies should “carry out their own due diligence” to check an umbrella company is operating legally.

He said: “There are some unscrupulous umbrella companies offering unfeasibly large rates of net pay which contractors need to be aware of when choosing an umbrella.

“The old adage ‘if it sounds too good to be true, then it probably is’ is the yardstick to apply in such cases.

“As enticing as such high returns of pay may be, it is more than likely that the umbrella company may be operating a tax avoidance scheme, such as a loan scheme for example, which the contractor could pay a heavy price for getting involved with.

“Agencies should also carry out their own due diligence when dealing with umbrella’s to satisfy themselves that an umbrella company is not involved in any foul play to avoid any future reputational and/or financial repercussions.”


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