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How to prepare for the IR35 tax change

How to prepare for the IR35 tax change

1 April 2021|Latest Posts, Legals & Compliance, Money

How to prepare for the IR35 tax change
How to prepare for the IR35 tax change

Head of Tax Partnerships at Markel Direct, Paul Mason, answers the most asked questions about IR35 according to search engine data.

Despite wide-ranging IR35 changes being introduced next month, research reveals that search interest in IR35 has plummeted since last year’s delay. The data, analysed by specialist insurer Markel Direct, shows that the search volume for IR35 topics has dropped by 71% since last year’s announcement that the tax legislation change would be delayed due to the COVID-19 pandemic.

To help ensure contractors are well-prepared ahead of the 6th April deadline, IR35 expert Paul has answered questions from ‘how to prepare’ to ‘how much worse off will I be’. Read on for more of Paul’s answers to help guide contractors through what the changes mean for them.

How to prepare for IR35

It’s important to understand the changes to IR35 and how they impact you as a contractor:

– Check your engagements – will you still be responsible for assessing the engagement (this is the case if you are working with small companies which have 2 of the 3 following characteristics: <£10.2m turnover, <50 employees or a balance sheet total of less than £5.1m), or will responsibility lie with the end client?

– Talk to your agency/end client– find out what steps are being taken to determine the IR35 status of engagements from 6th April 2021 

– Talk to your accountant – find out whether remaining as a limited company is the best option for your business, or whether you should move into an umbrella company/client payroll.

How to determine status?

Determining your IR35 status is based on several factors, including these three primary tests:

– Control

– Personal service

– Mutuality of obligations

If these don’t offer a clear opinion, then these secondary factors need to be considered:

– Financial risk

– Business enterprise

A comprehensive IR35 contract review will help if you, as the contractor, are responsible for determining whether the engagement is ‘outside’.

Who does it apply to?

IR35 legislation, also known as off-payroll working, applies to contractors (who undertake the work itself), end clients (who make the status decision) and fee payers (who can be end clients, but are often agencies where they sit above the contractor’s company in the supply chain). 

Can IR35 be backdated?

Whilst IR35 legislation is changing in April 2021, HMRC can open a retrospective enquiry into your tax and National Insurance Contributions, which could go as far back as four or six years depending upon the circumstances. HMRC have clarified that they will undertake such enquiries if they suspect fraud or criminal behaviour.

What does IR35 stand for?

IR35 stands for Inland Revenue 35, which was the name of the press release that first announced the anti-tax avoidance legislation. The correct term is the Intermediaries Legislation – the contractor’s company is the intermediary.

 

How much worse off will I be?

Calculating how much worse off you will be if you are deemed to be ‘inside’ IR35 depends on your individual circumstances. 

As an example, a contractor earning £75,000 a year would expect to take home £52,546.32 in retained income if they are ‘outside’ IR35. If they are caught ‘inside’ IR35, the contractor would take home £45,563.95 – so would be almost £7,000 worse off.

Additionally, if your engagement is ‘inside’, any subsistence costs will have to come out of your take home pay, which means that you could be considerably worse off than the £7K.

Does IR35 apply when working abroad?

If the contractor is a UK taxpayer, IR35 must still be considered even if they are working abroad or being paid in a different currency. Who determines the matter will depend upon whether the end client has a UK presence; otherwise the contractor must determine their own IR35 status.

Can IR35 be avoided?

You can’t legally avoid IR35 if you are providing services through a limited company. Your end client will make the decision or, if you are engaged by a small company, it is your responsibility. That doesn’t mean whether you want to apply IR35, but whether it should apply. 

Read the full list of the most asked IR35 questions

To find all the answers to the most searched for questions about IR35, head to the Markel IR35 hub and follow Markel Direct on Twitter.

Sources:

*IR35 interest rate based on Google Trends data from date range 23rd Feb 2020 – 23rd Feb 2021

*Avoid IR35 query results based on Google Trends data logged 24th February 2021

** Most popular query results based on Google Trends data on 28th January 2021

***Most asked questions based on Answer the Public data logged 28th January 2021

About the Author

Paul Mason, Head of Tax Partnerships at Markel
Paul Mason, Head of Tax Partnerships at Markel

Paul Mason is Head of Tax Partnerships at Markel.  Paul joined Markel in 1997 and heads up our tax partnership team. He works very closely with Markel’s Contractor Solutions division, having previously worked in general practice before moving into the insurance and consultancy arena.

Paul has been involved with IR35 since 2001, initially on the insurance side before providing advice on the subject to contractors. A regular speaker on IR35, Paul also works closely with Markel’s investigations specialists to ensure freelancers get the best defence in an IR35 enquiry.