The overhaul of the IR35 system comes into effect from April 2021 and has the potential to create a few bumps for both business owner and subcontractor alike. If you're concerned about the changes, I'm here to say don't worry, because I positively relish in smoothing out bumps! Navigating the nooks and crannies of IR35 can be time-consuming, so I've decided to write this blog to clear up any issues.
The current IR35 rules provide attractive elements for contractors and subcontractors. As a contractor, you simply hire who you need, agree a fee and a time to deliver the service. You have no further responsibility regarding how they pay their tax and NIC. For the subcontractor, you're responsible for taking care of your tax and NIC but at a more attractive rate than if you were an employee.
If you're a sole trader, IR35 won't apply to you. But if you work for your own limited company, then keep reading. If you act like a business, you must operate like one, which means you're outside IR35 and have rules to follow including business insurance, your own website, and a distinctive identity that separates your brand from others. You'll also use your own resources, equipment, and car (or cover your own travel costs). Importantly, and this is where the focus of HMRC's attention might lie; you must have multiple clients with fixed time periods for your projects, which must be non-continuous. After all, if you had just the one client and you worked for them all the time, even if the projects had a beginning and an end, you are seen by HMRC as an employee in all but name.
HMRC is looking to stop subcontractors who are employees in all but name, and whether deliberate or not, having an advantage – unfair according to HMRC – over contracted employees. If HMRC smooths this out, subcontractors will be on a level tax with hired employees – paying more than you used to – and it strengthens HMRC's purse. If they hadn't thought of this to swell the coffers before Covid, it is more than timely for them now when unforeseen spending has gone into the billions.
So, from April 2021 if you're a subcontractor, you'll have to pay the same tax as an employee to comply with the changes. There are upsides to this, given that as an inside IR35 individual, you weren't entitled to holiday or sick pay. You would now have access to those benefits as well as employment rights like minimum wage, maternity, and paternity cover.
If you're a business owner, it will be your responsibility to establish the status of your contractor and to set their tax band. If it's incorrect your business will be held liable by HMRC. To avoid the potential tax headaches (and if the subcontractor has proved to be a continuous and essential service provider), you might be as well to add them to your payroll.
To ensure everything is above board, and there is no room for any errors to occur, it makes sense to hand this critical issue over to a professional. You don't have to worry whether you've got it right or risk incurring the wrath of the taxman.
If you have a small or micro business, and you're dedicated to building your brand and your reputation, having well-versed accountants on hand is integral to your success. Someone to take care of the financial P's and Q's (which includes assessing whether a subcontractor can stay as such or should come inside the IR35 fold) while you concentrate on what you do best.
Unsure about how the IR35 changes will affect your business? Are you a contractor that's concerned about the impact on your bottom line? Get in touch with Evolve today.
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