After years as an employee at a technology firm, an IT analyst decides to set up their own limited company and begin contracting. Their new self-employed status gives them far greater flexibility than before. They can take on jobs as and when they want, as well as easily fit the work around their family. They can’t imagine ever wanting to be a permanent employee again. However, the private sector IR35 reform puts their status as a contractor in jeopardy and could result in a lengthy, expensive investigation.

Should IT contractors be worried about IR35? What can they do to protect themselves?

Why was IR35 reformed?

IR35 was first introduced in 2000 as an attempt by HMRC to crack down on tax avoidance by so-called 'disguised employees' – contractors who operate and bill for their services through a limited company but are expected to work more like permanent employees. Until recently, it was up to the contractors themselves to determine whether they fell inside or outside IR35. If they fell inside IR35, or the 'off-payroll rules', they were considered a 'disguised employee' and subject to pay income tax and employees’ National Insurance Contributions (NICs). If they fell outside IR35, they were operating as a genuine business and therefore paid corporate tax rates.

In 2017, the law changed in the public sector. It took control away from contractors and made public sector organisations responsible for assessing whether IR35 applied to their contractors or not. Similar changes will be applied to the private sector in April 2020.

The IT industry is considered to be one of the worst hit by these reforms. Many contractors now face huge retrospective tax bills, blanket IR35 assessments even when they are genuinely self-employed, and a bleak future filled with disputes and red tape.

Damaging blanket IR35 assessments

For many contractors, IR35 reforms in the public sector have proven disastrous, with many falling victim to blanket IR35 assessments, even if they can prove they are self-employed. Now, those operating in the private sector fear they are in for the same treatment.

Their fears are likely to be confirmed as, worryingly, lessons don’t appear to have been learned from the rollout in the public sector. HSBC has already pledged to stop engaging contractors by September 2019, and more than half of UK IT firms are considering taking a blanket approach to managing the new IR35 legislation. Generally, this is because they don’t have the time to assess contractors individually research by Brookson Legal revealed.

IT firms are more likely than businesses in other sectors to lay off contractors too. The research found that 61% of IT firms, compared to the UK average of 48%, said that IR35 will encourage them to reduce the number of contractors they hire, resulting in thousands of contractors potentially losing out on work.

Is your future as an IT contractor safe?

IT contractors most at risk are the ones which haven’t taken the time to understand these complex IR35 rules and put in place steps to prepare.

It only takes one contract to fall inside IR35 to throw an entire business into HMRC’s spotlight. If you’re unsure about whether you comply with the off-payroll tax rules, a sensible approach is to get your contract reviewed by a professional.

You can also quickly and easily work out your potential liability to HMRC should they deem you to be inside IR35 by taking advantage of Larsen Howie's IR35 Liability Calculator. This calculates the total back tax and NICs you may need to pay, plus interest and any penalties that may be applied by HMRC.

Protect your business with comprehensive insurance cover

We recommend that IT contractors meet with their clients and recruitment agencies to find out how the rules will directly impact them. Speaking to Financial Times, Sarah Cardew, partner and head of tax at Irwin Mitchell, a law firm, said contractors “should also be proactive by taking on a variety of assignments and having a number of clients.”

In such a worrying time, it may be tempting to take more dramatic measures to future-proof your business. At the same time, however, you should try to avoid falling for bad advice or taking advantage of so-called loan schemes which reduce the amount of tax you pay on your gross pay but will hold you liable for tax discrepancies should HMRC come looking – and they do. If something sounds too good to be true, it usually is.

Instead, a more sensible approach is to take out IR35 Tax Investigation and Liabilities Insurance, which covers the cost of professional representation for an HMRC enquiry as well as the back tax, interest and penalty liabilities that are due as a result.

If you’re concerned about IR35, please get in touch with our team of specialists, including our resident tax and IR35 expert Andy Vessey ATT. You can also take advantage of our contract reviews with comprehensive advice on how to stay inside the legislation, and find out more by reading the latest industry insight posted in our Knowledge Hub.

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