*UPDATE* - It was announced on 17 March 2020 that these reforms will be delayed until April 2021.

The IR35 ‘off-payroll’ rules will be extended to the private sector from April 2020 onwards, directly affecting a large number of contractors who are currently working through a Personal Service Company or recruitment agencies.

The IR35 legislation is anti-avoidance tax legislation designed consider and remove the potential tax advantages of providing services via a limited company by individuals.

The reforms introduced in the public sector in 2017 introduced the new requirement for the end-client to be responsible for determining the employment status of contractors, and from April 2020, this will be extended to all private sector business.

A determination of whether you fall inside IR35 will now be taken by the end-client and if your work is found to be inside IR35, the ‘fee-payer’ (the party closest to your limited company in the chain) is responsible for paying employers’ NICs, and deducting employees’ NICs and income tax from your invoice for services provided, and paying these liabilities to HMRC.

It is worth noting that the IR35 legislation has not changed, but instead HMRC have now placed the responsibility on determining the IR35 status of the assignment on the end-client, rather than the contractor and their limited company.

To help with this determination HMRC have an on-line Status Checker - https://www.gov.uk/guidance/check-employment-status-for-tax

IR35 is applicable if the end-client user is a medium or large sized company with exemptions currently in place if the end-client is a small business. In order to be classified as a small business, the end-client must meet at least two of the following criteria:

Annual turnover is no more than £10.2 million
Balance sheet total is no more than £5.1 million
No more than 50 employees.

Where the end-client meets two or more of these criteria, responsibility for determining the IR35 status of a contract remains with the contractor and their limited company and the changes do not apply. However, this exemption does not apply to public sector organisations.

So for medium or large sized companies, the changes mean the end-client is now responsible for determining the IR35 status of a contract with a Personal Service Company (PSC).

The end-client must confirm the IR35 status of a contract by providing a ‘Status Determination Statement’ (SDS). The SDS must be provided in writing to the contractor worker and, if an Agency is involved in the labour supply chain, a copy must be provided to the Agency responsible for paying the contractor.

If the assignment is offered as a PAYE employed assignment, there is no need for an SDS as IR35 does not apply because you are being employed as an individual rather than through your limited company.

If your client deems your contract to be outside IR35, then life carries on as normal – you operate via your limited company and pay tax in the same way as any other small company.

However, if you are found to be consider within IR35 from April 2020, your three options are:

Trade via your limited company - your ‘deemed employer’ will deduct all taxes, and pay you a deemed income, which you can withdraw from your company account. If you are VAT registered, the VAT element is excluded from the tax calculation before being added back on for payment to your limited company.
Trade via an umbrella company - PAYE umbrella companies are being offered to many contractors who are being considered to fall within IR35. These umbrella companies will act as the intermediary between you and the client, and trade will no longer take place through your limited company. You will be taxed as an employee, however the employers’ NICs must be paid by the umbrella company, and not be deducted from your net pay.
Take a permanent role – many contractors are looking for, or have been offered, permanent positions.