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Are you inside IR35? – the latest guide for freelance contractors

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New tax rules for freelance contractors and their clients came into force in April 2021. IR35, or ‘off-payroll working rules’, have caused confusion for contractors and the businesses that hire them.

Sole traders are not affected, but any worker providing services through an intermediary such as their own limited company – also called a Personal Service Company (PSC) – will have been following the changes closely.

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Craig Harman

As with any major shift in tax legislation, it can take a while for the implications of the new regulations to become clear. And as HM Revenue & Customs (HMRC) continues to update its guidance, many questions still remain, for example around the issue of employer National Insurance contributions and who will ultimately pick up the tab for this additional tax burden when a contractor is deemed to be ‘inside IR35’.

Here, Craig Harman, partner and tax specialist at Perrys Chartered Accountants, explains the basics behind the IR35 regulations, who it affects, and how to manage the transition to an ‘inside IR35’ status.

What does IR35 stand for?

It may sound like a top secret codename, but there’s a simple explanation behind the term. Back in the days when HMRC was called the Inland Revenue, a press release addressing the issue of tax avoidance by PSCs was issued. This was the 35th Inland Revenue press release of the 1999 budget, hence IR35.

What is the thinking behind IR35?

When individual contractors provide their services via a limited company, or PSC, there is a potential tax benefit both to themselves and to their client. Typically, the contractor can save on Income tax and NI contributions by receiving income in the form of a modest salary, topped up with dividends. Most of their tax is paid as Corporation tax, which currently stands at 19%.

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For employers, there is no obligation to provide a contractor with a workplace pension, nor to pay Class 1 employer NI contributions at the current rate of 13.8%.

If certain conditions are met and the contractor is ‘outside IR35’, it’s perfectly fine to work in this way. However, if the contractor is essentially an employee of their client – just being paid in a different way – the Treasury is clearly losing out on a valuable stream of tax revenue.

IR35 exists to ensure that these ‘disguised employees’ are taxed at source via the usual PAYE system, and that employers pay the relevant NI contributions for their workforce.

Who is affected by IR35 regulations?

Any contractor who provides services to a third party, whether working for the public or private sector, should be assessed for IR35 purposes. Previously, it was down to the contractor themselves to decide whether they were a ‘disguised employee’ and should therefore be taxed in the same way as any other staff member. However, from 2017, public sector authorities became responsible for making that decision, and since April 2021, medium-sized and large clients in the private sector (including charities) must decide on their contractors’ IR35 status.

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Where a contractor is working for a smaller business, it remains the contractor’s responsibility to decide on their own employment status. To qualify as a ‘smaller business’ for IR35 purposes, companies must meet two or more of the following conditions:

  • An annual turnover of less than £10.2 million
  • A balance sheet total of less than £5.1 million
  • Fewer than 50 employees

Inside or outside IR35 – how is the decision made?

There are various tests that must be applied to determine a contractor’s status. Confusingly, the guidance on this is far from crystal clear, with new case law precedents being set as decisions are challenged at HMRC tribunals.

Where it’s up to the client to assess status, they must outline their decision, and reasons behind it, in a Status Determination Statement (SDS) sent directly to the contractor. The contractor has the right to challenge the SDS.

HMRC provides an online status checker tool, CEST, however its conclusions are not always definitive, and it is highly advisable to seek expert advice from an IR35 tax specialist to discuss the CEST results.

Broadly, a contractor may be deemed to be inside IR35, i.e. an employee in all but name, if the following conditions apply:

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  • You are required to provide your personal service – you and no-one else will do the work i.e. you cannot send a substitute to work on your behalf.
  • You are controlled in the manner in which you do the work, i.e. you must be at a certain place at a certain time, rather than work according to your own schedule.
  • Mutuality of Obligations exists, i.e. there is an expectation that work will be offered by the client, and you are obliged to accept it.

Sounds simple? In reality, this is a nuanced area of tax law that continues to evolve.

What to do if your contract has been classed as inside IR35

Many contractors may simply decide to do nothing, and accept that their pay cheque will now land in their company bank account minus the usual PAYE deductions. It’s vital to remember, though, that they will be treated as an employee for tax purposes only – they will not receive other employee benefits such as holiday or sick pay.

Crucially, employers are NOT able to pass on to the contractor the additional costs that they incur, namely Class 1 employer NI contributions. But while this is clearly legislated against, there has been much concern amongst contractors about the issue of ‘indirect recovery’, whereby employer NICs are clawed back by paying lower contract fees. Umbrella companies and agencies are under scrutiny for passing on these costs to the contractor, with a group action currently underway.*

The message is: check your contracts and your remittance advice very carefully, and always discuss any concerns with a tax expert. Remember that IR35 should be considered on a contract-by-contract basis: some contracts may fall within the scope, some may not, depending on the nature of the working relationship.

If you disagree with the Status Determination Statement you’ve been given by your client or agency, seek advice at the earliest opportunity. IPSE is a not-for-profit organisation for the self-employed, and its website has a dedicated IR35 section. For a detailed insight on the status of your company’s freelance contracts, speak to an accountant with IR35 expertise.

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Covid grant scheme for Swansea businesses that don’t pay business rates

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photo of black cab on cobblestone road

An emergency grant scheme is now available for Swansea businesses in the leisure, tourism, hospitality and retail sectors that do not pay business rates.

Funded by the Welsh Government and run by Swansea Council, the Emergency Business Fund grant scheme is aimed at helping support businesses impacted by current Covid restrictions which are not eligible for the Economic Resilience Fund.

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Covering business impacted from Monday December 13 to Monday February 14, online applications are now open which cover two levels of grant award:

  • A £1,000 cash grant payment for hospitality, tourism, retail, leisure or related supply chain businesses which do not employ anyone apart from the owner, and do not have a property
  • A £2,000 cash grant payment for hospitality, tourism, retail, leisure or related supply chain businesses who employ staff through PAYE (in addition to the owner)

Also covering freelancers in the creative sector, both these grants are aimed at supporting businesses with an annual turnover of less than £85,000.

Businesses which may be eligible are asked to visit https://fundchecker.businesswales.gov.wales/businesssupport where the Business Wales eligibility checker must be completed before applicants are able to access the application form.

All applications must be submitted by 5pm on Monday February 14.

Cllr Rob Stewart, Swansea Council Leader, said: “It’s important all businesses in Swansea impacted by the current Omicron restrictions have access to financial support, with this latest grant scheme aimed at supporting many businesses that may not be eligible for the other support schemes already in place.

“We’re doing all we can as a council to assist our business community during these extremely challenging times, with more than £150m having been allocated to provide support since the onset of Covid.

“I’d encourage any business that may be eligible for emergency financial support to fill out an application. Council officers will do all they can to process payments for successful applicants as soon as possible.”

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A grant scheme for hospitality, tourism, retail and related supply chain businesses which are liable to pay non-domestic rates is also now live. This means these businesses could be entitled to grants of £2,000, £4,000 or £6,000, depending on their rateable value.

More information, eligibility criteria and both registration and application details for that grant scheme are available at www.swansea.gov.uk/CovidNDRbusinessgrants 

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Swansea Building Society appoints new non-executive director

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Swansea Building Society, ranked the most profitable building society in the UK last year, has appointed a new non-executive director – Malcolm Hayes.

Hayes comes to the role with extensive executive and board level experience gained within several major UK clearing banks, a specialist lending group, an ethical bank, and a large mutual credit union.

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After starting his career with NatWest, Hayes went on to spend over 25 years in Lloyds Banking Group, where he held senior risk and credit positions in the bank’s business and commercial divisions.

His 40-year career has seen him hold executive positions as chief risk officer, operational risk & compliance director, control function director, head of credit audit and head of enterprise-wide risk management.

Having retired from executive roles in 2019, following five years as the chief risk officer of Paragon Banking Group, Hayes currently also holds non-executive director roles at Reliance Bank Ltd and as chair of the board of directors of Citysave Credit Union Ltd.

He also has previous board experience as a director of the Agricultural Mortgage Corporation PLC and AMC Bank Ltd – wholly owned subsidiaries of Lloyds Bank PLC – and served as a board director of a Lloyds Bank subsidiary established to undertake residential property development.

Hayes’ new non-executive director role with Swansea Building Society sees him sit on the Society’s audit committee, risk committee and asset & liabilities committee.

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Malcolm Hayes, non-executive director at Swansea Building Society, said: “I’m very excited to be taking on this new non-executive director role with Swansea Building Society. The Society’s vision and ethics are truly inspirational, and the success the Society has achieved in recent years is a tribute to its customer-focused, common-sense approach to lending. I hope that the experience I bring to the role can help the society continue its success and allow it to help even more people build a better future for themselves and their families.”

Alun Williams, chief executive officer at Swansea Building Society, added: “We are delighted to welcome Malcolm to his new role of non-executive director. Malcolm has extensive experience, over many years, which will be invaluable in helping Swansea Building Society build on our success and achieve our business aims.”

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Neath-based Vortex IoT acquired by national tech company

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The Development Bank of Wales have announced that they have successfully exited Vortex IoT Limited just three years after providing initial pre-seed capital funding to the technology start-up that now employs 35.

The Neath-based supplier of environmental sensors, networks and data solutions has been acquired by  Marston Holdings, the UK’s leading provider of integrated, technology-enabled transport solutions. Figures have not been disclosed.

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Marston supports government, utilities and private sector clients through the delivery of market leading integrated technology-enabled solutions from design through to implementation, management and recovery.  Marston’s clients include local authorities seeking to build environmental schemes that reduce congestion and pollution.  With the acquisition of Vortex, Marston will strengthen its offering by delivering complementary air quality solutions that maximise awareness, identify pollution hotspots and improve public health. 

Headquartered in Neath, Vortex IoT was founded by CEO Adrian Sutton and CTO Behzad Heravi. It is made up of a highly-skilled team of 35 that includes engineers with expertise in emerging technologies, Artificial Intelligence (AI), 5G, LiDAR laser technology and machine learning. 

As equity funders, the Development Bank of Wales invested £250,000 pre-Seed capital followed by a further £250,000 from the Wales Business Fund alongside London-based Start-up Funding Club (SFC Capital). Having enabled Vortex to scale-up in just three years, the Development Bank has now exited.

Adrian Sutton, CEO of Vortex IoT, commented: “Joining Marston Holdings accelerates Vortex IoT’s ability to deliver social value and environmental change for clients, and we’re delighted to collectively build on the existing relationships we have established as trusted partners to our clients in bringing cutting edge smart city and environmental monitoring solutions to market.

“The equity funding and support from the Development Bank made a difference to our business, enabling us to be at the forefront of the fight against climate change with the development of solutions that help reduce carbon emissions. It’s also what has given us the platform to build a business that is attractive to bigger players like Marston meaning that we can continue to grow with the benefit of the Welsh ecosystem all around us.”

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Alexander Leigh, Senior Investment Executive with the Development Bank of Wales said: “As early investors in Vortex with pre-seed capital and follow-on funding, we are delighted to have supported the growth of this exciting business over the last three years.

“It’s hugely rewarding to exit a start-up after such a short period of time, particularly having seen the team benefit from the support available here in Wales. They could have set-up anywhere in the world but chose Wales because of our can-do attitude, the help available for entrepreneurs in the tech sector and the lower cost base.   

“Marston’s acquisition of Vortex now further accelerates the opportunity for the team to deliver their innovative air quality solutions that are very much needed for a zero-carbon economy whilst also continuing to invest in highly skilled jobs from their base in Neath. It’s a brilliant success story that we are really proud to have played a part in.  

The acquisition of Vortex follows the 2019 acquisitions of Videalert, a supplier of intelligent traffic management solutions; ParkTrade, a Swedish-based European tolling payments and collections business; and LogicValley, an Indian-based AI focused developer.  Vortex’s products further bolster Marston’s transportation technology division, ensuring Marston is best placed to meet the evolving needs of its client base. 

Mark Hoskin, Chief Commercial Officer at Marston Holdings added: “We have a long track record of successfully working in partnership with the public sector, and this acquisition reflects client feedback seeking innovative, technology-enabled solutions. COP26 demonstrated public support for driving the transition to a zero-carbon economy, and we’re pleased to further enhance our ability to support our clients and their residents through cleaner, healthier and more people-friendly communities.”

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