How off-payroll tax changes will affect contractors and freelancers

Off-payroll tax changes for contractors and freelancers

From April 2021, the way off-payroll tax works will change for the private sector. These changes will bring the private sector in line with changes already made to the public sector.

Originally, these changes were set to arrive in April 2020. But, due to the COVID-19 pandemic, the government has decided to push back the updated legislation, allowing businesses and self-employed workers to deal with the impact of the pandemic first.

So, what exactly are these changes and how will they affect the way you do business as a freelancer or contractor? This article examines the new legislation and gives you the information you need to prepare your business for the changes.

Changes to tax status in the private sector

Currently, as contractors, you can decide your employment status for each contract or engagement you have. This means you’re in charge of managing and determining your own tax after you’ve been paid.

From the 6th April 2021, it will be up to public sector clients and medium-to-large private sector clients to decide your employment status on each engagement. This decision, provided via a Status Determination Statement, is an employment status determination that should be based on your specific engagement with them. This means it’s down to your client to work out whether your agreement should be paid:

  • As GROSS, and therefore fall outside the Off Payroll Working Rules (IR35)
  • As NET, and therefore comes within the Off Payroll Working Rules (IR35).

If the client concludes that your agreement needs to be paid as NET, they will deduct tax via PAYE from your payment before you receive it. This would mean that your pay-check will reflect similarly to that of a regular employee of that company.

Will off-payroll tax changes affect small companies?

No. Small companies will not be required to undertake the Status Determination Statement, and the responsibility will lie with the contractor. To be considered ‘small’, a private sector company must have no more than:

  • 50 employees
  • £10.2 million in turnover
  • £5.1 million in balance sheets

Find out more about the definition of 'small companies'.

How off-payroll tax changes in the private sector affect companies

Under the new rules, medium and large private sector companies will have extra responsibilities when it comes to using contractors and freelancers. These include deciding:

  • The employment status of contractors on a case-by-case basis
  • What constitutes an ‘engagement’
  • Whether each engagement should be paid gross or net

With these additional factors to consider, some medium and large companies may decide that it’s easier to employ somebody full-time to carry out the work, rather than hiring a freelancer.

Before making a decision, there needs to be a contract in place, so that the specifics are clear to all involved parties.

Companies will be able to use tools such as CEST to make each determination.

What off-payroll tax changes mean for contractors and freelancers

As a contractor, you might notice several changes as both you and private sector clients adapt to the new tax rules from April 2021.

A change in your employment status

Depending on the results of your Status Determination Statement, your clients may start issuing your pay as if you were an employee of theirs. This means you’ll be taxed in the same way as an employee, but you won’t be entitled to any of the additional employment benefits, such as workplace pension contributions, paid holidays or sick pay.

A change in client preferences

As private sector companies adjust to the new rules and restrictions, they might find that it’s easier for them to hire someone in-house to do the work you were originally contracted for. This might make it harder for contractors to find new engagements.

Potential changes to your fees

If you fall inside the IR35, you’ll be paid as an employee, meaning your payment with be subject to PAYE tax before it reaches you. As a result, your take home may be less than you’re used to. This may lead to you increasing your fees.

If you work in a competitive market, you might end up increasing your fees and being outpriced by your competitors or being significantly more expensive than an in-house employee salary.

What contractors can do to prepare for private IR35 changes

There will be a few changes you need to make to your business to prepare for the IR35 changes coming in April 2021. The key to making sure you stay in charge of your taxes and aren’t seen as an employee is to make sure your contract and working procedures show you’re an independent contractor. This will include:

1. Prove you’re your own boss

Set your own rules for how, when and where you work. Lay out clear deliverables in your contract and stress that your company is responsible for delivering them, not you as an individual. You should also make sure you don’t take on any extra work or move to a new project from the same company without a new contract. Markel Tax offer a range of IR35 contract services.

2. Consider the supervision, direction and control of your client

Ensuring you aren’t under the supervision, direction or control of your client is essential to prove you are outside of IR35.

3. Avoid establishing mutuality of obligation

Mutuality of obligation is often difficult to evidence one way or another. To avoid it, you will need to avoid having long notice periods or termination clauses in your contract. Having either of these could imply that your client is obliged to give you work and you’re then obliged to complete that work, suggestive of an employer-employee relationship.

All these factors should show HMRC that you rely on several different projects and not one sole client to pay your bills. Therefore, there should be no need for you to be thought of as an employee of one of your clients.

Other ways that can help illustrate your company sits outside IR35 include:

  • Making sure your company stands out with its own website, tailored marketing and address and contact information – even if you work from your home.
  • Being VAT-registered.
  • Using your own equipment for work, not equipment provided by your clients.

Overall, you should be able to show that your company can stand on its own two feet without continued support from one client. As a result, you should be able to remain in charge of arranging your own taxes, so that your take home pay is not impacted.

For more information about the upcoming IR35 changes, visit our IR35 hub.