Being a contractor can be a little bit stressful, constantly in the back of your mind are the plentiful admin tasks you need to face – including tax requirements, National Insurance payments and the ongoing confusion surrounding the IR35 legislation. As a result, off-payroll working can cause a few headaches. That’s why it’s important that every contractor gets their head around the rules in place, including IR35. In this article we offer a complete guide to the off payroll rules for contractors.
What is off-payroll working?
In simple terms, an off-payroll worker is someone who works for a company but is not included in the organisation’s PAYE. Typically, this will include freelancers who offer workload support when required or contractors who join the organisation for a set period of time. It can also refer to consultants.
Are you an off-payroll worker?
The majority of off-payroll workers will be contractors who invoice for their work. But confusion can come into play for those who work through a mediator.
Mediators can include recruitment agencies or umbrella companies. Those who have secured work through an agency will typically be deemed as an off-payroll worker. But it does depend on the contract with the mediator in question. In terms of umbrella companies, many will be considered an employee as umbrella schemes run their clients on PAYE.
IR35 and off-payroll working – is there a difference?
The terms ‘IR35’ and ‘off-payroll working’ do operate in tangent and have plenty of similarities. However, there are a few key differences to be aware of:
Tax responsibility
Off-payroll working will simply introduce differences to the application of IR35 for contractors. In terms of IR35, contractors have been the ones who decide their employment standing. This made them responsible for their tax if HMRC did come to an incorrect decision about their work status.
But off-payroll working requires a contractor’s client to determine the worker’s employment status, and that end-client will be the one held accountable for any tax risk.
National Insurance
A big difference will come into play in reference to National Insurance. With IR35, if a contractor is affected, an employer’s NI will be simply subtracted from their charges. However, with off-payroll working, the end-client will now pay this in addition to their normal fee.
This will affect those working with recruitment agencies for their contracts. As the agency is considered the fee payer, they’ll be the ones who have to add the amount to their fee when paying contractors.
Tax relief
In addition to this, off-payroll workers will be prevented from claiming tax relief on expenses. This can negatively impact those who travel frequently or require overnight stays. It’s recommended that those affected by this rule seek fee renegotiation with their client to cover the costs.
Upcoming changes
Off-payroll working has been in place in the public sector since April 2017 to ensure companies are IR35 compliant. But it will now be extended to those also working with large to medium-sized private sector businesses. Smaller organisations will, however, be exempt.
Businesses have until April 2020 to prepare for these changes and it’s a huge shift in responsibility. Yet contractors won’t lose all power in determining their status. They can challenge the decision if they believe their client has got it wrong.
The changes to the private sector were originally planned for the start of the 2019 tax year. However, they have since been delayed as HMRC found several issues with the rollout within the public sector. By identifying these problems, the private sector rollout promises to be a smoother transition.
It may seem like a large change, but they are meant to provide an overall benefit to contractors. The rules will not only give more transparency but more certainty about a contractor’s status concerning IR35.
Working as a limited company
With regards to IR35, many contractors have chosen to operate as a limited company. This meant that their position with IR35 was clearer, and there were other benefits. But now with the changes coming into play with off-payroll working, there is confusion as to whether working as a limited company is still the best option.
As a contractor, you just need to ask yourself: will your work be inside or outside of IR35 and will you be working for smaller or larger businesses? If you think you’ll be working outside of the legislation and may be working with smaller organisations, operating as a limited company will still be more cost and tax-efficient.
But, if you only have upcoming contracts that will operate outside of IR35 and will only be covering medium clients, then the benefits for operating as a limited company become very minor and you may want to consider other options.
Umbrella companies
For many, these changes are causing confusion and stress. Contractors aren’t sure where they’ll be in terms of the off-payroll rules. Not only this, but they are concerned about renegotiating fees once businesses have to start paying their NI. Luckily, there are other options.
When changes hit the public sector in 2017, most contractors turned to umbrella companies. This was because many businesses moved all their contractors inside IR35 to avoid repercussions. As a result, contract workers were being taxed a similar rate to employees, without being able to enjoy any of the benefits.
Umbrella companies offered a better option, effectively giving them the best of both worlds. This meant that they didn’t have remain in the disadvantageous situation forced upon them.
Employee benefits
For a contractor, the main benefit of working with an umbrella company will be having access to full employment rights. This will be alongside the statutory benefits that normal employers must provide, including holiday pay, sickness pay and a pension. The umbrella company will provide full HR capabilities too.
In this sense, a contractor will be able to experience the stability of full-time employment while enjoying the freedom to pick and choose their contracts. Being able to enjoy the best of both worlds can benefit contractors outside of their career too. The employment benefits can be key for those looking mortgages or finance.
