On The Spot Blogs
#Budget2018 - IR35 - What yesterday's press release should have said
As practical accountants, we see the reality of true self-employment for many of our consultant clients.
This is what yesterday's Budget press release should have said to consultants, sub-contractors and freelancers:
If your clients are medium or large businesses, they’ll be deciding whether you’re self employed or an employee for tax deduction purposes only. Or put it another way, if they are a small company, the rules don’t apply and you may be able to continue as normal.
If your client decides that you’re effectively an employee, then your client (or its agency) will need to deduct income tax, employee NIC and pay employer NIC without any associated employment rights.
- Consultants, you are likely to suffer the employer’s NIC because your clients won't be willing to pay it. If they'd needed and budgeted for a permanent employee you or someone else would presumably be on an employment contract, with all the benefits of that.
- This leads us on to the very uncomfortable outcome that a Consultant may pay full PAYE income tax and NIC, but without any employment rights at all.
- The mechanics of this are predictably complicated and involve a payslip being issued to your limited company, although your company’s accounts will show it has paid you dividends.
- Issuing invoices and being VAT registered makes no difference. Your clients work with the net of VAT invoiced amount and deduct tax from that, regardless of how you’ve taken the money out of your company.
- Regarding whether your client is a small business, if the usual Companies Act definition is used, your client should be under at least two of the following:
- Turnover < £10.2m
- Gross assets < £5.1m
- Number of employees < 50
- How will you be able to check if a prospective client is small or not? You could look at filed accounts at Companies House, but these don’t have to be filed until 9 months after the year end.
- Will you have to trust your prospective client to get this right? Will procurement managers have this information? What if it changes mid-contract? Who will pass on this information to you, the procurement department or an agency? Does the definition of small also apply to the agency?
What can you do about this?
- You may decide to work only for small companies! You’ll need to ask for written confirmation that your clients are small and are therefore not applying these rules. Try to have contract terms that your clients will pay any tax due if they make an incorrect assessment. Commercially, however, this may be unlikely!
- On the other hand, if your clients are medium or large, you’ll need reassurance they still regard you as self employed. HMRC has a ‘CEST’ tool (Check Employment Status for Tax) but it has its limitations.
- Your clients are expected to use the CEST tool to determine whether you are self employed or an employee. If they get a favourable result, ask for a copy and keep it on file in case of a future enquiry. If they get an unfavourable result, ask to look at it in case it’s been used incorrectly.
- HMRC recently admitted that the tool isn’t required if there’s no Mutuality of Obligation (‘MOO’) to offer and accept work. Tribunal cases have confirmed this point. If this stands, then being self employed might simply be determined by that point, if it’s clear.
- If your clients insist they need to apply these rules and they have assessed you as an employee, have contractual terms that mean they pay the employer’s NI if, commercially, this is available to you.
- Consider whether you can increase your fees to offset the increased tax burden. Again, commercially, this may not be available to you.
- If you do have one longstanding client, you may decide that now is the time to end your contract and apply for a different employment with them or another business. We’ve seen this to some extent with the public sector version. At least you won’t pay employer’s NI and you’ll get employment rights in return for paying PAYE.
There is a consultation period and we expect many comments will be given resulting in clarifications or even improvements to the above!