Self-employed contractors face National Insurance crackdown under IR35 reform

As part of the Autumn Budget 2018, Chancellor Philip Hammond has announced that reforms to IR35 – which previously hit the public sector – will now be rolled out to private sector businesses, meaning some contractors may see their National Insurance contributions go up. Reforms to the off-payroll working rules were introduced to the public sector in 2017, and there’s been a consultation on bringing the stricter rules into the private sector between May and August this year.

What is IR35?

R35 targets people working off-payroll through an intermediary business – usually this is a personal service company (PSC).

You’re classed as being ‘inside’ of IR35 if the person providing the services for the company would be an employee if the PSC wasn’t in place.

There are three main ‘tests’ that can check whether you’re operating inside IR35:

whether you have control over how work is completed – for example your working hours, or the location where the work is carried out. If the choice isn’t down to you, you will likely be inside of IR35

whether there’s a mutuality of obligations – for example, is the company obligated to give you more work once you’ve finished the task. If it is, you may be inside of IR35

whether you personally have to complete the work you do. To be outside IR35 there should be a substitution clause in your contract, and you should be in control of the substitute.

Under Mr Hammond’s plan, the responsibility of deciding whether a contractor is correctly working outside IR35 will move from the contractor themselves to the organisation employing them. This mirrors a change introduced to public sector organisations last year.

Why is there a clampdown on this rule?

The changes are mainly to target ‘synthetic self-employed’ people who set up PSCs with the sole purpose of paying less National Insurance.

While those employed by PSCs have to pay the same Class 1 rates of National Insurance as other employees (in addition to employer’s contributions), those who are employing themselves through a PSC can effectively ‘underpay’ themselves to reduce the amount of NI coming out of their wages, and reap more rewards through dividends – which are taxed at a lower rate and are exempt from National Insurance contributions.

Following the roll-out of the reform in the public sector, Mr Hammond asserted that there was still widespread non-compliance in the private sector and that’s why the changes are being extended.

When will the changes take place?

The extended IR35 rules will be rolled out to large and medium-sized businesses in April 2020. Medium-sized businesses are those with 50-249 employees; large businesses are those with 250 or more employees.

Let's Chat

We'd be good together!