Are you a contractor? A freelancer? An agency worker? A consultant? A subbie? An umbrella worker? The way you pay tax may be changing from 6 April.

Chris Simons, Deputy Director at HM Revenue & Customs answers questions on the key things you need to know about off-payroll (IR35).

With everything else going on, it might be tempting to put off thinking about the changes to the off-payroll working rules – or IR35 as you may know them – but we are here to help. My teams have been providing opportunities for contractors to hear from us and ask questions, on here, through our own webinars and also attending events hosted by representative trade bodies. Below I'll answer some of the questions contractors regularly ask us about the changes.

What are the off-payroll rules (IR35)? When do they apply?

The off-payroll working rules - or IR35 – are tax rules which already exist for some contractors.

The rules are designed to make sure that individuals who are working like employees but through their own limited company pay broadly the same Income Tax and National Insurance contributions (NICs) as individuals who are directly employed. The rules use the existing employment status tests to determine if you are employed for tax purposes (“inside IR35”) or self-employed for tax purposes (“outside IR35”).

The rules apply to all contractors who work through their own limited company or a similar type of intermediary (such as a partnership). If you work through this type of structure – regardless of whether an agency helps you to find work or not – then the rules need to be considered. If you work as a sole trader (not through your own limited company) or you are an employee of an agency or an umbrella then the rules do not apply.

Why are IR35 changes happening in April 2021?

In March 2020, the Government announced that changes to the off-payroll working rules were being delayed, not cancelled. This was to help businesses deal with any impacts of the COVID-19 pandemic. It has now put in place the legislation to introduce the changes to the off-payroll working rules on 6 April 2021. Many businesses have now carried out significant preparations to make sure they are ready for the changes.

The change also brings the administration of the off-payroll working rules in all other sectors in line with the way they’ve been administered in the public sector since 2017.

What is changing?

These changes may affect how you pay Income Tax and NICs.

The changes move the responsibility for deciding if an engagement is employed or self-employed for tax purposes from you to the client organisation. The change also moves the responsibility for deducting Income Tax and NICs to the client organisation or the agency who pays your fees. How the rules work will depend on who your client organisation is. This contractor factsheet and flowchart set out the different scenarios. We also have simple case studies which can help.

If your contract beyond 6 April 2021 is subject to the off-payroll working rules (“inside IR35”), you may pay more income tax and NICs. The client organisation or agency who pays your fees will be responsible for employer NICs.

If you client is a small non-public sector organisation you will need to continue to consider the rules yourself.

As a contractor, what should I be doing to prepare?

Working with your client on the new rules:

• Talk to your client organisation. Find out if your client organisation is a small non-public sector organisation – they are required to tell you if you ask. You may also need to provide your client organisation with information to help them decide if the rules apply.
• Understand your client's status decision. Your client has to provide you with a status determination and the reasons behind it if your engagement is ‘inside the rules’ (employed for tax purposes). You have the right to query a determination made by a client organisation.

Your income and your returns:

• If you wish to qualify for statutory payments, you will still need to pay yourself a salary from your limited company, even if your contract is “inside IR35”.
• Submit RTI returns as normal for salary payments made by your limited company. For payments which have been subject to Income Tax and NICs by the client organisation or agency paying your fees, these should be reported on the FPS as non-taxable, non-NICable payments. This means you won’t have to pay Income Tax and NICs again on the salary or dividends taken up to the amount which has already been subject to Income Tax and NICs through the off-payroll working rules.
• Submit SA returns for any other income which has not been subjected to the off-payroll working rules. The SA return will only need to include taxable pay.
• Submit Corporation Tax returns and account for the treatment of VAT as normal.

Can I still work through a limited company?

Yes. The rules don’t prevent you from working through a limited company, but client organisations may consider changing the way they engage contractors working through limited companies. This is a business decision for client organisations to make, and client organisations will be free to decide how they engage their workers.

Some client organisations might decide to offer you an employment contract or engage you through an agency or an umbrella company. Other client organisations may choose to continue engaging you through your own limited company where this suits their business model.

If you are changing the way you work, we have guidance and support to help you make sure you are not caught out by tax avoidance schemes.

If you do decide to no longer work through your own limited company, there may be additional actions you need to take regarding your company (for example, closing your company down).

What do I do if I disagree with the status determination provided?

You have a statutory right for contractors to query or challenge a client organisation’s status determination in real time. Client organisations will be required by law to review their status determination and respond to any challenge within 45 days. This right is an additional statutory layer of protection for off-payroll contractors .

Is there a connection between employment status for tax and employment rights?

Falling within the off-payroll working rules does not change your status for employment rights. There are separate frameworks for determining employment status for tax and for rights, with no direct link between the two.

If you wish to challenge your employment status for rights, you can take your case to an employment tribunal, regardless of your tax status.

Could a blanket status assessment lead me paying too much tax?

Your client organisation must take reasonable care when making a decision about whether the off-payroll working rules apply.

Applying a decision to a group of off-payroll workers with the same role, working practices and contractual terms may be permissible in some circumstances, but it is not right to rule all engagements to be inside or outside of the rules irrespective of the contractual terms and actual working arrangements.

As set out above you have a right to challenge the decision. If your challenge leads to your client changing their determination from ‘inside IR35’ to ‘outside IR35’, then the person who deducted tax and NICs from your payment should correct this through their payroll and reimburse you. Our guidance on the disagreement process gives further detail.

Will I be liable for tax if my client organisation gets my status determination wrong?

No. We don’t want contractors to worry about unexpected tax bills if their client organisation gets a status determination wrong. That is why, after April 2021 you will not be liable for unpaid Income Tax or NICs if your client organisation makes the wrong decision where that client organisation is a public authority or medium or large-sized non-public sector organisation.

As your limited company will continue to be responsible for status determinations where your client organisation is a small non-public sector organisation, your company will remain liable for any tax due for those engagements.

If my client finds my contract “inside the rules” will HMRC look into my historic compliance?

HMRC will never use information acquired from the off-payroll working rules changes to open a new compliance enquiry into returns for tax years before 2021-22, unless there is reason to suspect fraud or criminal behaviour.

This includes any decisions that clients may have already made to prepare for the April 2020 changes, which were delayed.

Use HMRC’s support to prepare for the upcoming changes

My teams are working to provide additional support to help you understand the changes. Our help and support page lists our resources available to support contractors. This includes details of the webinars we’re holding. We’re also taking part in events with others, such as the ones we joined with Brookson and IPSE this week.

Do keep asking us your questions. We are here to help support those who want to get the rules right and are committed to finding the best ways to support you, and get you the information you need.