There has been legislation in place for 20 years that was designed to prevent tax avoidance by workers and the firms hiring them. For the last few years this has focussed on the public sector but as of April 2020 it will also apply to the private sector as well.
The government are trying to resolve the inequity of contractors paying less tax compared to an employee based on the same level of income. Equally they are targeting businesses who avoid paying National Insurance, PAYE, pension contributions etc. by using contractors rather than taking on employees.
Where this is most prominent is in the financial services sector, particularly the banks who use IT contractors for their major infrastructure projects. Earlier this month RBS announced that it will no longer take on contractors. The other banks that have also done the same are Barclays Bank, HSBC, Lloyds Bank, Morgan Stanley and Tesco Bank.
Any future relationship between the bank and the contractor will involve the payment of PAYE which will reduce the earning capacity of the contractor while still paying tax.
It does mean that there will be a large number of contractors who will need to carefully consider their tax position such as their personal allowance as well as their pension position as they come under greater scrutiny from HMRC. There are also implications for those contractors with mortgages if their income takes a significant hit.
Genuine contractors, freelancers, interims or consultants who are in business on their own account, should have nothing to fear from IR35. This is so long as time is taken to understand how the legislation works and best practice is applied.
Andrew Hannay said “Already at RobMac we are seeing more people coming to discuss their situation in advance of the changes taking place next year. Typically, in the recent past the contractor’s service company would make the pension contributions however it may be much more tax efficient to consider the contractor making personal contributions into his or her pension in order to reduce his/her overall tax bill. It’s important therefore for people to re-examine their tax position before it’s too late. ‘’
If you would like to discuss your situation in relation to IR35, please click on the following link where you can set up a meeting with one of our financial consultants: https://www.robmac.co.uk/book-an-appointment/
