There can be a plethora of benefits when it comes to being self-employed, but very few benefits outweigh that of being your own boss. However, being self-employed is not as clear-cut and straightforward as we’d like, and many are left scratching their heads as to how they should operate when it comes to winning profitable contracts, especially with so many changes occurring.
Often, professionals such as locum doctors and IT Contractors will be classed as self-employed, and by default they will be eligible for a number of tax benefits, as they will often have a series of expenses associated with their role. As such, it is often the case that any retained monies can be reinvested into the company. Other tax benefits included being taxed on dividends rather than the whole amount received. Some may even set up a limited company to convey a professional image to potential clients. In fact, some have even found that many public service companies will only deal with those who have a limited company. However, the way a limited company is taxed is different to that of a self-employed individual, which has often led the HMRC to assume that something more sinister is afoot when it comes to some limited companies and the way they operate, despite this not always being the case.
There can be a number of different reasons as to why a public service company uses a limited company as opposed to a self-employed individual, but for the most part, there is less to contend with when it comes to taxation.
Back in 2000, the IR35 legislation was introduced to try and tackle those who were abusing the system previously. There is no ‘set-in-stone’ example, but it was alleged that some contractors were enjoying the benefits of running a limited company, while still enjoying the employee benefits from their end-client. Of course, this wasn’t the case for every contractor, and when the legislation was introduced, it caused a lot of confusion and uncertainty for those who were self-employed.
However, it did provide the HMRC with a method of vetting the working practices of those who self-employed to ensure that they were paying the right amount of tax. As with many regulations within the industry, they have been subject to change, often using the current climate for the bulk of its decision-making. As such, many contractors and tax accountants have noted a series of changes made to IR35 to ensure all companies are working in the right way when it comes to taxation.
What Is the Aim of The IR35 Legislation?
IR35 was introduced to ensure that those working as a contractor where being charged the right amount of tax, as well as receiving the correct benefits when acting as a contractor. In short, IR35 looks to ensure that your contract and the way you work meets their definition of self-employment. If a contract is found to fall into IR35, then locum doctors and IT Contractors could be subject to Schedule E taxation and National Insurance. Of course, different contracts could mean that you fall in and out of IR35. As such, it’s important to ensure that you have the right kind of tax accountant, as you will need to ensure that the correct deductions are being made from each stream of income in relation to tax.
What was seen by some freelancers as offering a professional image soon became a tax loophole, which allowed a number of people to pay less tax due to operating under a private service company, which meant national insurance and tax wasn’t being paid at source, reducing the rate from around 45 percent to 20 percent. The loophole was given attention in the media as a number of BBC stars had been founding using the practice, with the BBC itself benefiting as it didn’t have to contribute towards National Insurance contributions. With such a loophole being present in the spotlight, it came as no surprise that changes were afoot.
The Changes Being Made
During the Budget 2016, an announcement was made that public-sector companies would no longer be able to pay contractors via a private service company if the end-client feels the contract falls within IR35. Up until recently, those who operated a private service company would be able to determine as to whether a contract was subject to IR35 or not by using the advice of their tax accountant, or the HMRC website. However, from April 2017, this will all change. Rather than the private service company deciding as to whether a contract was IR35 compliant or not, the onus would instead shift to the public service company offering the contract.
How These Changes Affect IT Contractors and Locum Doctors
If an IT consultant or locum doctor merely operates on a self-employed basis, then they will probably keep on working in the same way. However, those who operate via a private service company could find that they are automatically subjected to a higher rate of tax, whether they agree with the IR35 decision or not. The changes are also likely to cause confusion among those who work under a private service company, as contracts that fall under private sectors are still allowed to be vetted by the company rather than those offering the contract. This is not the only area that could cause confusion, as the private service company will also need to show details of any other contracts that don’t fall within the IR35 bracket.
Evidently, there will be times when those operating within a private service company will not agree with the decision made by the end-client, and could potentially rock the boat when it comes to maintaining a relationship that has proved to be beneficial in the past.
What Can Be Done Moving Forward?
The first thing we should try to do is not to worry. Granted, suddenly finding that you’re pushed into a higher tax bracket can be an underwhelming experience, but it’s important for contractors such as locum doctors and IT professionals to keep their eye on the ball when it comes to developments around IR35, or at least seek the professional advice of a professional tax accountant. Of course, there will be instances where your working methods do fall within the IR35 framework, and there’s little that can be done unless a series of amendments are made to ensure that you’re working in the right way. However, regardless of whether you are based in London or Birmingham or in United Kingdom, team at The Accountancy Solutions will be able to ensure that your contracts are being evaluated properly, and will look to offer advice should the end-client make the wrong decision.