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Don't Get caught out like the celebrities with IR35
21 March 2020
You may have seen a number of high profile TV Presenters and Celebrities hit the news with regards to their disputes with HMRC – all surrounding the IR35 legislation and the possibility of owing the tax man a lot of money.
Unfortunately, the same issues could apply to you and your company from April 2021!
After targeting the Public Sector in 2017, the revised tax legislation will be hitting the private sector from 6th April 2021.
Are you prepared for this?
Will it affect me?
- Are you a company with subcontractors operating through their own personal limited companies?
- Are you an individual subcontracting your services through your own personal limited company?
- Are you an agency providing workers who fall within the above categories?
If YES – IR35 may affect you.
Where did it all start?
The IR35 legislation (often referred to as Off Payroll working) has actually been around since April 2000, introduced by Gordon Brown. At this time lots of employees were leaving their jobs, setting up their own personal limited companies and then just contracting to the original employer. This was very common within the IT sector.
Why would people do this you might ask?
It’s much more tax efficient to operate through a personal limited company, you can remunerate yourself by dividend, paying lower tax rates and also avoid National Insurance all together. A personal service company also allows for other tax planning and savings. As the contracting company, if the person providing their services to you is not an employee, you avoid all employer obligations including the payment of Employer’s National Insurance. They raise the invoice and you pay it, job done.
So as you can see, it is a win-win for all parties…. The loser is HMRC.
Gordon Brown decided this practice was potential tax evasion whereby if you removed the personal limited company, would the person behind it actually just be an employee? The legislation was introduced to ensure all of these persons using a personal limited company must establish if they’re in fact for all intense and purposes, an employee. Once the individual established this, they’d then have to make additional payments of tax and national insurance to compensate for the tax they were saving.
What’s the problem with the existing legislation?
Complex and heavily criticised by many, especially in the professional world, the legislation’s very hard for the ordinary person to adapt and enact and the additional tax payments due are not straight forward to calculate. It’s also almost impossible for HMRC to police. Therefore, it’s no surprise the legislation’s not been successful in collecting additional revenue from the taxpayer.
Due to the Coronavirus pandemic, HMRC have now deferred the date for a year from April 2020 to 2021` however it is still coming into force and the onus will fall on to the Contractor to establish if their subcontractors are captured within IR35. These changes will only apply to Medium and Large sized companies. With increasingly sophisticated software and access to more and more information, the hit and success rate will increase significantly.
The current legislation however, still applies to all individuals operating through personal limited companies to establish if they should be making additional tax and national insurance payments, If they’re contracting to a small sized company.
What do you need to do?
If you think any of the above may apply to you, speak to the Tax team at Fortus for further guidance.
We can help you review your situation, workforce and contracts and advise of the necessary steps you need to take.
Getting this wrong is not an option – HMRC can go back 4 years for tax purposes and 6 years for national insurance. They also have the right to impose interest and severe penalties.
A little work now can save a lot of stress and money later.