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Until April 2020, when the Government will implement this new legislation, it is the contractor’s responsibility to determine whether they are operating inside (also known as caught by) IR35 or outside IR35, and whether the same tax should be paid as if the contractor was employed by the end client. Should HMRC decide to investigate the true workings of their contract and find the contractor had made the wrong determination then their personal service company is liable for any unpaid taxes. From 5 April 2020 the responsibility, and therefore any potential tax liabilities, falls with the engager if they are medium or large, (small businesses are exempt, more specifically those where two of the following apply – turnover less than £10.2m, balance sheet less than £5.1m, not more than 50 employees). The company paying your personal service company (generally the agency) will be liable for submitting the Income Tax and National Insurance that becomes payable if the role is considered inside IR35 (the same deductions that would be made if a contractor deems themselves caught under current legislation). It will receive confirmation from the end client who will have a legal responsibility to provide that opinion, or determination, for the role. This means that if your end client is medium or large, it will have to undertake an IR35 assessment for each assignment and decide whether you are operating inside or outside IR35. HOW WILL THIS AFFECT YOU? The changes apply to those working through a limited company. They will not make any difference to workers using an umbrella company as all income is already taxed as employment income. WHAT WILL THE EFFECT BE? If the assignment is deemed outside IR35 then the director/shareholder can continue to extract profits in a combination of salary and dividends. If the assignment is deemed inside IR35 then all of the fees will be subject to income tax and national insurance. Simply put, VAT is paid on the gross amount, the employer’s NI (your PSCs NI) is paid over by the agency, along with employee’s NI and PAYE, and you are paid the net plus the full VAT figure. No more tax (ie corporation tax, dividend tax) is due on this payment and it can be taken straight out of your company. Your pay rate will be lower than if it was outside IR35 with this difference being the Employer’s NI (and Apprenticeship Levy if applicable depending on the size of the agencie's staff and deemed payroll). A LITTLE MORE DETAIL: For example, a contractor caught inside IR35 who is used to earning £500 per day outside IR35, is likely now to be offered a rate of around £435 per day inside IR35 (the difference being the submissions that agency needs to make to HMRC for Employer’s NI, as well as the apprenticeship levy if it applies – this is no different from paying £500 per day and the PSC submitting the Employer’s NI – it’s just that this now has to be made on the agency’s ‘deemed’ payroll (the contractor is classed as a ‘deemed employee’). From the £435 per day, employment deductions of Employee’s NI and PAYE will be made, before the ‘deemed’ payment is made to the ltd company. If one simply compares £500 per day to the new payment of £435 less deductions, then clearly there is a significant difference. But it is not that simple as there are other rules / obligations that need to be considered. For those INSIDE IR35: Your company is paid the Deemed Payment (the net payment after deductions made to the contractor’s ltd company): Once the deemed payment is made to the ltd company, you still need a way of taking that money out of your ltd company. This can be done in 2 ways: 1. Dividends: If you’re a director of your own company, you might choose to pay yourself a dividend from the company’s profits. You can pay yourself a tax-free dividend up to the total of the deemed direct payment received from contracts in the public sector, where Income Tax and NICs have been deducted at source. You don’t need to declare that dividend on your Self Assessment tax return. 2. Payroll: You can pay yourself for the work provided to your client through your company’s payroll. As employment taxes have already been paid on the amount your intermediary (your ltd company) receives, you can pay yourself that amount without deducting Income Tax or NICs. And the icing on the cake: No Corporation Tax… When you are calculating your company’s turnover, you should deduct the VAT exclusive amount of the invoice, which is the amount from which Income Tax and NICs were deducted at source. Your company accounts should show this deduction to make sure the amount is not taxed twice. So to put it simply, the amount paid to you by the agency is yours to take out of your PSC (your ltd company) WITHOUT ANY FURTHER DEDUCTIONS. For those OUTSIDE IR35 To get your £500 per day out of your ltd company, again you can pay yourself dividends, or a salary (or mixture of both) Dividends: The tax advantages between dividends and salary are diminishing but, nevertheless, there is still a slight advantage to dividends. As opposed to the Inside options above, your dividend will be liable to dividend tax, AND corporation tax. Payroll: You can take it as salary – but your company will be liable for Employer’s NI (aha, so there’s the difference between the £500 and £435 already gone), then there are the same NI and PAYE deductions taken that were taken for your deemed payment, meaning that if you were to pay yourself purely by means of a salary, your take-home will be the same as if you received the deemed payment from the agency. And to keep things really simple, using a compliant umbrella company means that the legislation will not apply, you will not have the headache of running a company, and your net pay will be virtually identical to a deemed payment.

With the impending rollout of the off-payroll rules in the private sector, closely mirroring the rollout to the public sector that we saw rushed through in April 2017, the importance of working through a compliant umbrella company is as important as ever. Clearly, not all contractors use umbrella companies, and the continued use of a PSC is still acceptable, but not always to best approach if the off-payroll rules (essentially IR35) applies to your assignment. With the public sector rollout, the industry saw an increase in more dubious umbrella companies offering loan schemes to reduce (avoid) tax and NI contributions. Essentially, with these schemes, a contractor would be paid from an employee benefit trust in the form or an interest free loan that is never expected to be repaid. Unfortunately, and often unbeknown to contractors, these schemes are illegal and HMRC is determined to close them. Perhaps more concerning for any contractor that has been remunerated in this way is that HMRC is also entitled to collect unpaid taxes and NICs due on the loan payments, going back as far as April 1999!! This has come as quite a shock to as many as 50,000 contactors who have used them, many receiving life changing demands, some over £100,000. It is estimated if a contractor earning as ‘little’ as £40,000 per year over 5 years has been paid in this way they could face a tax bill of over £50,000. As a responsible agency we have a preferred list of umbrella companies that we provide to our contractors but on many occasions a contractor has their own preferred option. In these circumstances we will carry out due diligence on these to ensure they are compliant although if we are provided with false information we cannot always guarantee HMRC will not be knocking on the contractor’s door in the future. For any contractor that believes their agency will have to pick up their tax bill, you will find you are sadly mistaken unless your agency clearly coerced you into using a non-compliant umbrella offering such an illegal scheme. Any reputable agency would not dream of taking such as risk. The moral of this is if it appears too good to be true, it probably is. And it will come back to haunt you. Our compliance team are here to assist with all on boarding and are happy to provide our extensive list of compliance umbrella service providers.

WHAT IS OFF PAYROLL WORKING IN THE PRIVATE SECTOR? You can read in my previous blogs my disdain at HMRCs implementation of Off Payroll Working in the Public Sector. Not because I disagree that the correct tax should be paid by all contractors, but the way HMRC have forced unfair decision making processes, inadequate decision making tools, unfair liabilities for 3rd parties, and no employment benefits where tax is paid as an employee. However, this is a more restrained article aimed to give some basic guidance to those in the Private Sector who may not have much of an understanding of either IR35 or the implementation of Off Payroll Working in the Private Sector, Until April 2020, when the Government will implement this new legislation, it is the contractor’s responsibility to determine whether they are operating inside (also known as caught by) IR35 or outside IR35. Should HMRC decide to investigate the true workings of their contract and find the contractor had made the wrong determination then their personal service company is liable for any unpaid taxes. From 5 April 2020 the responsibility, and therefore any potential tax liabilities, falls with the engager if they are medium or large, the definition of which is still to be confirmed. The company paying your personal service company (generally the agency) will be liable for submitting the Income Tax and National Insurance that becomes payable if the role is considered inside IR35, it will receive confirmation from the end client who will have a legal responsibility to provide that opinion for the role. This means that if your end client is medium or large, it will have to undertake an IR35 assessment for each assignment and decide whether you are operating inside or outside IR35. HOW WILL THIS AFFECT YOU? The changes apply to those working through a limited company. They will not make any difference to workers using an umbrella company as all income is already taxed as employment income. WHAT WILL THE EFFECT BE? If the assignment is deemed outside IR35 then the director/shareholder can continue to extract profits in a combination of salary and dividends. If the assignment is deemed inside IR35 then all of the fees will be subject to income tax and national insurance. Simply put, VAT is paid on the gross amount, the employer’s NI (your PSCs NI) is paid over by the agency, along with employee’s NI and PAYE, and you are paid the net plus the full VAT figure. No more tax (ie corporation tax, dividend tax) is due on this payment and it can be taken straight out of your company. Your pay rate will be lower than if it was outside IR35 with this difference being the Employer’s NI (and Apprenticeship Levy if applicable depending on the size of the agencies staff and deemed payroll). For a more detailed example of the impact please see https://www.gsatechsource.com/blog/2018/01/turning-down-an-ir35-contract-think-again