Busting the myths of IR35: what it really means for contractors

Changes to IR35 tax rules for contractors may only be two months away, but most contractors remain confused about what the changes will mean – and whether they need to do anything before the 6 April implementation date.

From that date, if you are a contractor and your contract is deemed to be ‘inside’ IR35 – meaning that HMRC feels that you are working on a self-employed basis when, in actual fact, the service you provide your client reflects that of employment – you’ll be considered an employee for tax purposes.

That means you’ll effectively be required to pay tax at the same rate as an employee.

So, with many contractors telling us they are unsure what the changes mean for them, Hiscox take a look at some of the myths around IR35 to provide you with all you need to know about the changes ahead:

1. IR35 changes apply to all contractors

That’s not true. In fact, despite the headlines, the new IR35 changes only actually apply to contractors providing their services through Limited Companies, also known as Personal Service Companies (PSCs). If you are an umbrella company worker, a Construction Industry Scheme contractor, a direct PAYE employee or a sole trader, it won’t affect you. Also, ‘small’ companies have been made exempt from the rule changes, so if your contract is with a company deemed by the government’s rules to be small, you shouldn’t be affected. However, if like a lot of contractors, you operate through a limited company for a mid or large-sized business, you may well be affected.

2. I need to tell HMRC I am a contractor

That’s also not right in most instances. Part of the big change is that the government is making it the responsibility of the company you work for to deem whether you fall inside IR35 and need to pay more tax. That doesn’t mean you should completely forget about it though. Being deemed ‘inside’ could mean you’ll be earning a lot less – so you may want to seek advice from your tax adviser or accountant on what this will mean for your future income… and whether you want to continue operating as a Limited Company.

3. If I’m deemed to be inside IR35, I can appeal and get it overturned

Under the new rules, there will be an opportunity for a challenge – but, ultimately, it will be up to your end-client, the company you are contracting for, to make the final decision on your status. So, you will have limited influence over the final outcome. Also, if you make a challenge, the client will have up to 45 days to produce their paperwork, by which time you could already be out of pocket. That’s another reason to seek advice now on where you will likely stand – so you can plan accordingly for any potential change to your status.

4. My contract says I’m a genuine contractor and I have multiple contracts – so I’ll be considered outside IR35

Again, this isn’t a black and white issue. Clients will make a call on your status based on ‘practice’ as well as what’s written in the contract. So even if your contract is explicit, if they feel that in practice you are doing the work of an employee and should be deemed ‘inside’, that’s what they will go with. In terms of having multiple contracts, that doesn’t automatically rule you out either – as each contract will be considered on a case-by-case basis.

5. I have a Statement of Work – so that proves I’m supplying a service and must be a contractor

If you genuinely supply ‘Statement of Work’ service, meaning services that are not labour or personal services, then you may well be deemed outside IR35. Again, however, this will be assessed in terms of practice rather than what’s simply written in the contract – so it will pay to not automatically assume that you are exempt.

With so much ambiguity remaining around IR35 changes – and so little time until they come into force – you should act now to better understand how you might be affected, and how the changes might impact your income.

Contacting your accountant or tax adviser is a good place to start.

For more information on IR35 and how it will affect contractors like you, why not visit the Hiscox small business blog and read further on the upcoming changes to the way the government looks at the industry here.

Hiscox have been protecting small businesses and contractors for over 25 years and have developed insurance specific to the risks you face, to find out more and get a quote today visit www.hiscox.co.uk/companybug or call 0800 280 0359.

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