Please note: Due to the Coronavirus (COVID-19) crisis, the government announced on 16 March 2020 that the proposed reforms to the IR35 off-payroll working rules would be delayed for 1 year, from 6 April 2020 until 6 April 2021. These changes have now come into force.
The Chancellor’s Autumn Budget 2018 included a broad set of changes that apply to a variety of businesses operating in the UK. From new betting restrictions and an increase in road maintenance spending, to a high street rescue package and an increase in the National Living Wage, company owners need to be aware of several key policy shifts on their way in the months to come.
Yet the single greatest announcement unveiled as part of this year’s Autumn Budget that small business owners and contractors need to understand is a change to existing IR35 rules for off-payroll workers operating in the private sector. Contractors will be hit particularly hard by the changes to IR35 rules – although, as long as you are aware of your business obligations under the new rules, there’s no reason to fret.
What has changed about off-payroll working (IR35)?
A worker is considered an off-payroll worker when they carry out work for a client through their own intermediary. The most common example tends to be a personal service company.
The off-payroll working regulations companies must already adhere to came into effect in 2000, and they require all individuals who work like employees through a company to pay taxes that are similar to other permanent employees. These rules are largely focused on contractors and agencies deploying staff to carry out work for companies they aren’t technically employed by. According to HMRC, the UK Government loses an estimated £1.3bn per year due to contractors or companies responsible for contractors failing to comply with the rules.
A new measure introduced in the Autumn Budget 2018 will soon make it a lot more difficult for contractors and the companies they work for to avoid paying the income tax they owe under IR35 rules.
After the 2019/20 tax year, UK businesses will become responsible for assessing an individual’s employment status, as part of their compliance with existing off-payroll working rules. According to the UK Government, this added layer of responsibility is a relatively simple update that brings the expectations for private businesses in line with public sector organisations – which became subject to a similar reporting rule in 2017.
This means that starting from 6 April 2020, medium and large businesses must sit down and figure out whether these tax rules apply to any individuals that are working through their company – and if certain individuals are found to fall under the reformed IR35 measures, the company, agency or third party paying the company that worker is employed by will henceforth need to deduct Income Tax and National Insurance Contributions, and also pay employer National Insurance Contributions.
Both the off-payroll working rules and the Construction Industry Scheme (CIS) are likely to apply if you are a subcontractor working in the construction industry through a limited company or partnership. You will subsequently need to apply special rules to stop Income Tax and National Insurance Contributions being paid twice on the same earnings.
If you’re a contractor or a self-employed worker, don’t panic
It’s important to note that the responsibility to assess your employment status and pay or deduct tax contributions falls on the businesses you’re carrying out work through – not you. It’s also worth mentioning that HMRC will not come after you retrospectively for non-compliance. The UK Government has said there will not be targeted campaigns concentrating on previous years.
Crucially, off-payroll working rules don’t apply if the agency, company or a third party supplying workers directly employ them and deducts Income Tax and National Insurance Contributions.
Medium and large companies that employ contractors or interim workers should identify how the imminent legislation will apply to them and make those individuals aware of the anticipated changes. If you need help or advice, the UK Government has a dedicated IR35 helpline to handle enquiries.
What has changed about your personal tax allowance?
Another key announcement in the Chancellor’s Autumn Budget 2018 is a planned increase in your personal tax allowance. Starting in the 2019/20 tax year, UK workers will benefit from an increase in their tax-free personal allowance from £11,850 to £12,500 for basic rate taxpayers. Meanwhile, the higher rate threshold will be raised from £46,350 to £50,000.
This planned increase had originally been announced to take place in the 2020/21 tax year, and so many small business owners will consider this a pleasant surprise for next year.
Starting in 2021, the Chancellor also stated that your personal allowance and HMRC’s basic rate limit will start to increase based on the Consumer Price Index.
All changes applying to basic rate and higher rate taxpayers include tax on non-savings and non-dividend income – and no changes will be made to National Insurance Contributions, Corporation Tax or the taxation of dividends.
The bottom line on IR35 rules
Zooming out for perspective, the Chancellor’s Autumn Budget 2018 has some critical changes that contractors and limited company owners have got to be aware of. Businesses that pay non-employees to carry out work as a contractor or interim staff will have new tax responsibilities in line with public sector organisations, but contractors or self-employed individuals themselves shouldn’t need to take any action personally.
Small business owners and contractors should also benefit from a personal allowance increase and a rise in the higher rate threshold premises.
But if any of this remains unclear, when in doubt you should always seek professional advice about what you can and cannot claim, your reporting responsibilities and which schemes your business could benefit from. Your first port of call should always be HMRC, and you should definitely get in touch with a professional accountant for advice.
Looking for more information about company taxes and Self Assessment? Explore the Rapid Formations blog. There you’ll find all sorts of information on Corporation Tax, VAT, company filing requirements and how to let HMRC know about company changes.