IR35: the change is coming

A week ago, a firm which has active contracts with the Ministry of Defence became the first private company to ban workers who are limited companies. It simply told its hundreds of “Ltd” workers it has on-site that they must switch to an umbrella company or quit.

Traditionally, a contractor, or a self-employed person, usually chooses to set up a Limited Company or work through an Umbrella Company (you can click here to read a page which we have put up summarising the pros and cons of limited vs umbrella company). Most contractors choose to set-up a limited company because this is widely considered to be the most tax efficient method to maximise your take-home pay. Why? Because a limited company allows contractors to claim various expenses and paying lower taxes by taking a dividend instead of a full salary.

So the government is bringing in a new legislation which will ensure that contractors who are doing the same job as an employed worker are not getting a higher take-home pay simply because they work through a limited company. In addition to that, the government is also making changes to umbrella companies – one such change is contractors working through an umbrella company cannot claim travel and subsistence expenses. The bottom line is: the new IR35 legislation will ensure that people who benefit from tax savings are honest contractors, while moving those who should be ‘employed’ back to paying the correct PAYE payments.

Public Sector

It’s important to point out that this legislation will only affect public sector clients and placements. Private sectors are not affected (yet).

From 6 April onwards, every public sector department is required to go over their need for contractors – reviewing the contracting roles and seeing if the roles could be replaced with standard employees. Public sector departments also need to review their off-payroll contractors making sure they work through an umbrella company or on PAYE.

Another point to note is: IR35 status for Public Sector Contracting will be determined by the client, not the contractor.

As a result of these changes, we anticipate that most public sector contractors are likely to go on an agency’s PAYE scheme instead of going to an umbrella company, as there is not much difference between the take home pay through the agency’s PAYE vs an umbrella company.

Still confused? You’re not alone, because tax is a complex subject. The good news is, our team of London Accountants at TaxAgility is here to help. We will first seek to understand your situation, then see how the new legislation will affect you. This is why we always offer the first consultation free of charge. Call us today at 020 8780 2349 or complete the enquiry form and we will call you back.