·         Research from Direct Line for Business suggests that contractors are at risk of infringing on IR35 when it comes into force in April

New research¹ from Direct Line for Business reveals 2.6 million UK contractors (52 per cent) could see their tax status change when IR35 comes into force in April. The study revealed that over half of full-time contractors (57%) are likely to be at risk of infringing on IR365 as well as 47% of part-time contractors, raising concerns over whether contractors are adequately prepared for and aware of the new regulations.

The new legislation concerning off-payroll working will affect those who provide a service to a business through their own personal service company, a partnership, a managed service company, or as an individual. Coming into force for the 2020/21 tax year, the new rules will mean that if a contractor provides a service resembling full-time employment, they will be liable to pay tax like a full-time employee.

The most common reasons for contractors falling within IR35 are:

·         The client providing the consultant with instruction, guidance and advice on how to complete a project (18%)

·         Personally carrying out work for a client not being able to provide a substitute (17%)

·         Client having full control and oversight of the consultant’s work (13%)

·         Consultant being unable to take on other projects while working for their current client (11%)

Mike Martin, a Chartered Tax Adviser from Edinburgh, said: “IR35 is a set of tax laws which form part of the Finance Act. The first piece of legislation came into force in April 2000 and from April 2020 we have a further set of amendments affecting large companies who employ contractors. The rules apply to all public sector and private sector companies (and charities) that meet two or more of the following conditions: they have an annual turnover of more than £10.2 million, they have a balance sheet total of more than £5.1 million or they have more than 50 employees.

“So, if you are a contractor who currently provides services to one of these organisations, then it is up to that engager organisation to determine your status and effectively tax you as if you were one of its employees by applying the off payroll working rules.”

Karneet Chowdhury, Business Manager Office and Professionals, Direct Line for Business, said: “Flexible working is a priority for so many people, so it is not surprising setting up as a contractor is still an appealing option to many people. IR35 will mean huge changes for a lot of self-employed workers so we would urge them to seek expert advice and be prepared for April 2020 to avoid any further charges and stress. Despite the tax changes, being in control of your own work hours still offers many benefits and provides opportunities for workers to take advantage of. We would encourage those working for themselves to keep up to date with legislation to ensure they reap the benefits and avoid any pitfalls.”

Direct Line for Business is offering the following tips to contractors concerned how IR35 could affect them:

·         Keep on top of your contractor admin

One of the least exciting elements of working as a contractor, but the introduction of IR35 will make it even more important that contractors stay on top of their accounts, tax returns and past contracts. Submitting a late or erroneous tax return will arouse the HMRC’s suspicions and make it more likely that you will be investigated for breach of IR35. Taking measures, such as hiring an accountant to submit tax paperwork, can significantly reduce your chance of being targeted for an investigation. If you do end up on the taxman’s radar, HMRC may conduct retrospective investigations of your past contracts, so it is imperative that you keep records, such as telephone logs and copies of emails, so that you have proof of your day-to-day working arrangements should they have any questions at a later date.

·         Do your bit to stay in line with IR35

Common issues, such as directly replacing an employee or being individually named within a contract instead of operating as a business-to-business service provider, can be avoided by carrying out the proper due diligence before starting work on a contract. Consultants should always start a contract on the understanding that the role is for a contractor, while they should also always operate under ‘contract for services’ arrangements, as a business-to-business service provider through your limited company. While IR35 specifically applies to limited companies in certain circumstance it can apply to limited liability partnerships. Sole traders should also be wary of their status as their client, rather than the sole trader themselves, would be responsible for any financial penalties should the contractor be found to be working as a ‘disguised employee’.

·         Stay independent

Working for yourself has got you this far, so try to avoid slowly becoming a part of the furniture at your client’s business. Working for a prolonged period of time at any one place can increase the possibility of being included in company-wide activity, getting business cards or obtaining staff benefits, but any of these could be in contravention of IR35. Similarly, avoid being identified as a ‘disguised employee’ by maintaining control over where, when, what and how your work is carried out.

·         Get up to speed with the law

While there is no such thing as an IR35-proof contract, paying for a contract review is still essential for contractors looking to stay IR-35 compliant. When you get a new contract, have it professionally reviewed by an expert who can identify any badly worded clauses that might put you inside IR35 from the outset. It is also worth familiarising yourself with other terms, such as Mutuality of Obligation (MOO), which is used to determine employment status, and be sure to request a confirmation of arrangements letter from your client, to confirm that your working relationship is a business-to-business one.

Ahead of the implementation of IR35 Direct Line for Business is advising all sole traders who work with businesses to ensure they know what specific function they are offering to their clients and how to keep their remit outside of IR35. Consultants are generally self-employed, independent experts who possess a high level of specialist knowledge or skills, not available within a business. A consultant is different from a contractor or a freelancer in that they rarely carry out work themselves, but instead advise their client on how to implement a certain idea or project. Contractors are typically hired to carry out work on one specific project on-site at their client’s premises under a fixed-term contract, while freelancers tend to work away from their client’s premises on a range of projects, either on an hourly rate or a fixed price depending on the terms of their employment.

-Ends-

Notes to Editors

¹          Research conducted by Opinium among a nationally representative sample of 1,252 employed UK adults between 22 and 24 October 2019, of which 190 were consultants and 882 were employees at a business

For further information please contact:

Direct Line Group
Unni Henry
Senior PR Consultant
Tel: 01903 636 149
Email: [email protected]

Direct Line for Business

Launched in 2007 Direct Line for Business provides a range of insurance products for the small business sector direct by phone or on-line.

Direct Line for Business insurance policies are underwritten by U K Insurance Limited, Registered office: The Wharf, Neville Street, Leeds LS1 4AZ. Registered in England and Wales No 1179980. U K Insurance Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

Direct Line for Business and U K Insurance limited are both part of Direct Line Insurance Group plc.

Customers can find out more about Direct Line for Business products or get a quote by calling 0345 301 4827 or visiting https://www.directlineforbusiness.co.uk