There are some significant changes coming in from April 2021, impacting how the tax side of things is decided upon and dealt with between a Ltd Co contractor and their end client.
Up until April 2017, it was down to the contractor to decide their IR35 status (if you have no idea what IR35 is, we suggest you read this page first). What they decided made no difference to the end client/agents, who pay the contractor gross of any taxes and had no interest in IR35. Many contractors considered their working practices to be outside IR35, often with formal backing from the likes of QDOS. This enabled the contractor to choose to claim valid business expenses, and also withdraw funds from their Ltd Co as they see fit. Most commonly this would be via a very modest salary, the bulk of their personal income being via dividends.
From April 2017 this was changed for contractors working in the public sector. Here, the public sector organisation was responsible for making the determination on IR35. At least in the short term, this lead to many contractors working in the public sector being deemed inside IR35, and being paid as such (ie effectively via a payslip, with PAYE/NICs deducted at source).
Some contractors (reluctantly or otherwise) accepted this. Some managed to successfully convince their client that the work was outside IR35. Some left the role, potentially moving to the private sector where for the time being at least it was still the contractor who made the decision and was responsible for it.
From April 2021, for medium and large engagers in the private sector, it will follow the public sector rules in that the end client will be responsible for the decision re IR35.
It’s worth mentioning if your client is “small” then rules will continue as they currently are. Ie it will be down to you as contractor to make the assessment. Whilst you likely won’t know the precise size of your client, to count as “small” they need to meet at least 2 of the following 3 criteria:
– turnover less than £10.2m,
– balance sheet total less than £5.1m
– employee headcount below 50.
Sometimes it will be obvious to you whether your client meets this or not. If you’re unsure, ask the client.
This all depends on how your client(s) react. We would recommend you have a discussion sooner rather than later with any client(s) you anticipate you may still be working for post April 2021.
Client says you’ll be outside IR35
If they’re prepared to agree to treat you as outside IR35 from April 2021 onwards, brilliant. You’ll arguably be in a better situation than you are now. Purely financially things will be the same, but from April 2021 you won’t even have the risk of HMRC disagreeing with the decision later down the line. Ie HMRC could disagree with the decision, but it would be down to the client to argue with HMRC, and potentially to pay any extra taxes if they lost.
Client says you’ll be inside IR35
Unfortunately we anticipate this may be common, at least as an initial stance from the end clients. Ignoring how you might react, the client will typically be indifferent between inside and outside, with inside being the safer option for them, even if it’s wrong. Ie potentially they can be held responsible for the underpaid taxes if they treat you as outside and HMRC later successfully argue that was wrong, it should have been inside. If on the other hand they treat you as inside and it turns out to be wrong, there’s not a lot that can be done. You as contractor can complain to them, but there’s currently no external route for you, other than to simply leave and work elsewhere.
If the client insists you’ll be inside IR35, your options are:
1) accept it. This will virtually always mean a significant increase in your overall tax bills (corporation tax will plummet, but impact of that dwarfed by increase in personal tax/NICs). In reality, if you accept this will apply for the foreseeable future, it probably doesn’t make sense for either party for you to still operate via a Ltd Co. Ie typically we’d suggest at least considering closing your company down, and instead working via an umbrella, or possibly asking the client if they’ll take you on as a PAYE employee.
2) challenge the client. They need to consider your challenge and respond, but there’s concern that most will not change their stance, and there’s not much else you can do.
How well this option works will likely depend on the relative power between you and the client. If your client is enormous, and there are hundreds/thousands of contractors with similar skills to you, the sad reality is they’ll have all the power. Hence they’re not likely to care too much what you think. If on the other hand the client isn’t huge, and/or your skills are more niche and particularly critical to them, then you’ll have more clout. In the latter situation, it may be that they’ll be prepared to work with you on getting a contract and working practices set up that make it abundantly clear you’re outside IR35.
3) leave, trying to secure a contract elsewhere that will be considered outside.
How easy this option is will depend on how the market overall reacts to these changes. Potentially your current client may be more risk averse than most, and there may be lots of similar contracts elsewhere, with a client happy to treat you as outside IR35. On the other hand, if all corporates take a risk averse approach, then outside IR35 contracts may be hard to come by. In this situation, again it reduces your power in any negotiations.
Nobody knows! It really depends on how the big corporates react. Many banks are already stating they’ll take the safe route, by simply not taking on Ltd Co contractors at all. Other less risk averse industries are keeping their cards close to their chest.
If a few of the big players are prepared to take a risk and work with outside IR35 contractors, this could lead to them getting first pick of the most highly skilled workers, as all else being equal contractors would prefer to work on an outside IR35 contract than an inside one. In turn this may mean other corporates initially taking a more risk averse route will lose out, struggling to get the better talent. This might encourage them to change their stance as time goes on.