Following reports that 42% of UK companies are unaware of the new IR35 tax rules that come into force in April 2020, the GGF advises all Members to prepare for, not just the changes but the legal and financial implications of the changes.
IR35 rules seek to stop so-called ‘disguised employment’, whereby people work for firms and organisations as contractors using intermediaries, such as limited companies, which can slash tax bills for both them and their employer.
This is permitted where contractors or freelancers work for numerous different firms but not when they are mainly working for just one and would normally be an employee with PAYE tax.
The new rules now force private sector companies to be responsible for deciding if a freelancer or contractor’s employment status is correct – rather than the individual (self-employed/freelancer/sub-contractor) deciding it themselves.
According to accountancy and business advisory firm, BDO, the Treasury forecasts that the additional tax this will collect is £3.12billion over four years from 2020/21 – 2023/24, figures that demonstrate how much it will cost business.
What do IR35 changes mean for companies?
- Potential cash flow problems for sub-contractors who will have to pay their income tax and NI directly
- Sub-contractors working for one company could pay up to £9,000 per year more in tax
- Potentially more being paid by contractors using sub-contractors
- It could make the employment of sub-contractors more difficult if there is a dispute over the sub-contractors status
- Cost of delays in completing work for contractors
- Delays and increasing costs will lead to customer dissatisfaction and potential financial penalties or legal costs
- Fines of up to 30% of the tax sum owed for non-compliance. So if a company owed £10,000 in tax the fine could be as high as £3000)
Good news for Small Businesses
There is a proposed exemption for small businesses.
Companies are defined as small under the Companies Act 2006 if they make no more than £10.2million in turnover, has a balance sheet total of no more than £5.1million and hires no more than 50 employees.
Paul Falvey, tax partner at BDO explains: ‘It is helpful that the proposed exemption for small businesses seems fairly straightforward: they must test themselves against the Companies Act thresholds at the end of their accounting year – if they qualify as small then, they are outside the rules for the whole of the next tax year. For example, if you are small for your accounting year to 31 December 2019, you do not fall within these rules for the 2020/21 tax year.’
James Lee, GGF Director of External Affairs commented, “It appears that there could be a ‘stay of execution’ for the IR35 tax changes with small businesses being exempt until 2020/21 but the GGF will be seeking advice from tax experts to ensure GGF Members are fully aware of the implications of IR35. In addition, we will also lobby the Treasury and HMRC to continue and extend the exemption for SMEs under the current legislation.”
HMRC has an online tool for companies to check their employment status. You can access this tool here. https://www.gov.uk/guidance/check-employment-status-for-tax. However please note: HMRC has acknowledged that the CEST tool is limited and fails to give the correct answer in 15% of cases. CEST is currently being reformed as part of HMRC’s preparations for the IR35 changes being introduced in April 2020.
The GGF will cascade more information and guidance before the end of 2019 and the changes being enacted in April 2020.
Word on the street
According to the financial website “This is Money” a big crackdown on limited company contractors is in the pipeline with HMRC preparing to pursue those considered to aggressively flouting the rules.