Earlier this week we shared a petition against extending IR35 legislation to the private sector. If that sounds like a load of accountancy jargon to you, we understand.
However, there’s a big chance that the changes that the government are hinting at will have a major effect on your life as a self-employed person. To get a better handle on what this might mean, we sat down with Rachel Whitman of My Accountant Friend to find out more.
Remind us, Rachel, in as few accounting words as possible: what is IR35 legislation and who does it currently affect?
IR35 is an HMRC tax avoidance legislation designed to combat companies offering the services of one person (who, in the eyes of HMRC, should be taxed at the standard PAYE rates). It currently affects small businesses and contractors working through their own limited companies. If you’re outside of IR35 it’s good; if you’re inside, it’s bad. You can read more about this on our IR35 accountant and contract review page.
How long have the government been pushing this IR35 legislation?
Although HMRC has been challenging contractors’ incomes for decades, IR35 became law through the finance act in April 2010. Earlier this year, HMRC made changes to public sector workers’ IR35 status. Where your status would normally come down to the terms on your contract, it was put in the hands of the recruiters.
To avoid them having to cough up for costly investigations, many recruiters decided to automatically deem their workers inside of IR35.
What has changed recently? Why are people currently lining up to sign petitions?
In a nutshell, they are trying to extend the same changes that they’ve made to the public sector into the private sector. This would make it almost impossible for contractors to work through their own limited company with any benefit (bearing in mind that the personal tax benefit is almost outweighed when you consider that limited companies are paying corporation tax too).
So, there’d be no point in becoming a limited company? You’d be better off staying in full-time employment?
Well, I wouldn’t necessarily go that far, but it’d certainly make it less attractive from a financial point of view. You have to remember that contractors, freelancers and the self-employed pay a huge amount into the national economy, and they help to drive the entrepreneurial brilliance that this country is known for. To do this, however, they have to take considerable risks.
They can be out of work for weeks at a time, and they rarely have the structural support that comes with working for a big company. The personal tax benefits that they currently get through registering as a limited company mean that they can offset some of these potential detriments.
In short, this IR35 legislation would have a huge negative effect on the country’s entrepreneurial workforce.
And that’s why you’re advocating the signing of this petition against IR35 legislation?
Definitely! And we recommend that all our clients and any contractors do so, too. In fact, there’s a link to the “Do not extend IR35 legislation to the private sector” petition right there!
If the government gets their way, how exactly will this IR35 legislation affect freelancers and independent contractors in their everyday working lives?
It would mean that contractors would be subject to standard PAYE tax and affect the business-related expenses they can claim. They could either do this via their limited company or through an umbrella company. Either way, it would make working through a limited company slightly pointless.
Is there anything else we can do to try and stop these changes?
1 – Sign the petition. 2 – Sign the petition. 3 – Did we mention… sign the petition!
Do you have a particular message for My Accountant Friend clients or potential clients on this front?
Although this could be a game changer for contractors, currently it’s just a lot of talk and possible scaremongering. We’ll be updating all our clients and Life Hub readers as and when we can, and we also have another alternative for the contractors that decide to go down the umbrella route. So, do not fear… MAF is here!
If you’d like to discuss IR35 legislation and what it might mean to you and your business, feel free to give us a call whenever you like. No pressure, no commitments… we just like to chat about IR35 legislation! (Sorry, we’re weird that way.)