Do you operate a limited company through which you contract to larger companies? There are new IR35 rules coming into effect from 6 April 2021.
What are the IR35 rule changes in 2021?
Up to now, most companies in this situation will be aware that their income might be liable to IR35. From 6 April 2021, where you contract through your company with medium or large companies, it’s the company you work for, that large or medium company, which now has to decide whether or not you are genuinely self-employed and whether or not to deduct tax from the payments it makes to your company.
So, what’s a medium or large company? It’s one which:
- Has a turnover of £10.2 million or more
- Has more than £5.1 million gross assets on the balance sheet
- Has 50 or more employees
What is the significance of these changes?
By shifting the burden of the decision to the larger company as to whether the IR35 rules should apply to the payments to your company, it is made much more likely that IR35 will be applied and tax will be deducted.
If the large or medium company decides that your company should be subject to the off-payroll rules, then it must issue a “status determination statement”. For larger companies with relatively few contractors like you, it may be a fairly easy task to perform a thorough status determination review on each.
It’s going to be far harder for larger companies with many hundreds of small companies contracting with it and, in those cases, the danger is that the larger company will take a blanket approach and decide to deduct tax in all cases, even where it is not justified.
It may be some small comfort that the onus is on the large or medium company to demonstrate that they gave full consideration to all the relevant factors in reaching their status determination.
Plus, there is an appeals process if you do not like the result of their status determination. You would have 45 days from the date of their determination to respond and they must either confirm their existing decision or go along with your reasoning and issue a revised determination. How likely are they to change their decision? Who knows!
If they do decide to deduct tax from payments to your company, they will still pay you the output VAT on the invoice you sent them, but they will deduct PAYE and the employee’s national insurance from the remainder.
What about the employer’s national insurance of 13.8% though? Who pays that? In theory, it’s the liability of the medium or large company you are contracting with. But they may decide to renegotiate the rate they pay you to cover their costs.
Finally – what if you are not contracting with a medium or large company, just a “small” one as defined by the above criteria? For you, nothing changes – the responsibility for applying IR35 rules to your own company’s income rests with you as it did before.
As always, if you have any queries, please contact us.