Current IR35 rules and how they affect consultants 28 Mar 2023
What points need to be considered when setting up as a pharma consultant in the UK? From the type of business to establish, to insurance and off-payroll taxation requirements, there are many factors to contemplate. Read on for an overview of the current IR35 tax rules and sign up for our free webinar, ‘So you want to be a Pharma consultant? Company structure and insurance implications’.
Anyone considering setting themselves up as a pharma consultant in the UK needs to be aware of IR35 – the common name for the rules on off-payroll working. These rules were brought in to ensure that contractors and freelance workers pay broadly the same income tax and national insurance (NI) as an employee would. They came about because there had been a loophole that allowed workers to pay less tax by setting up a limited company or partnership.
The latest reforms came in on 6 April 2021 and remain in place today. However, they can prove confusing to off-payroll workers and the companies that hire them. Some in government and among the self-employed believe the complexities of the system are stifling business growth. The most recent iteration of IR35 took away the right of limited company contractors to determine whether IR35 applied to them and has made private sector bodies responsible for this – along with penalties for getting it wrong. A previous revision, in 2017, gave public sector bodies this responsibility.
During her leadership campaign, in August 2022, Liz Truss pledged to review the IR35 rules. She stated that the changes that had been made to IR35 were “all about trying to treat the self-employed the same as big business”. She noted that the self-employed did not receive the same benefits or have paid holidays, like those working in a big company, and thought this difference should be reflected in the tax they paid.
According to a House of Commons Public Accounts Committee report on IR35 from May 2022, around £236 million was owed to HMRC by public bodies alone for the 2020-21 tax year because of ‘incorrect administration’.
Once she became Prime Minister, in Autumn 2022, Liz Truss went further on IR35, committing to repeal some aspects of IR35 from April 2023, in Chancellor Kwasi Kwarteng’s mini budget of 23 September.
However, the subsequent Rishi Sunak government reversed this plan and has kept the current IR35 rules intact. This means ‘client’ companies using self-employed contractors remain responsible for deciding whether those contractors are ‘inside IR35’.
IR35 and consultants
What do consultants need to be aware of in relation to IR35? A consultant’s IR35 status, which can vary from contract to contract, determines their tax status with HMRC. Those deemed inside IR35 – and working essentially as a ‘disguised employee’ – must pay the same tax and NI as employees and employers. This means paying employee tax and NI, as well as employer’s NI, but without enjoying the benefits of being employed.
The legislation applies to ‘personal service companies’, also known as limited company contractors, which are workers who supply services to an end user via a limited company and are both a director of the company and a fee-earner.
However, IR35 does not apply to small businesses. These are defined as those: having an annual turnover of less than £10.2 million; a balance sheet total of less than £5.1 million, plus less than 50 employees, on average, in an accounting year.
While IR35 does not apply to sole traders, employment status does, and the rules for deciding employment status are similar to those for determining IR35 status.
To work out employment status for tax, the government offers an online tool called Check employment status for tax (CEST).
Essentially, for larger clients to determine whether a contractor is inside IR35, the specifics of the contract must be considered. If the terms suggest the contractor is working in the same way as an employee, then taxes and national insurance must be paid accordingly.
Read more about the off-payroll working rules on the government website.
Find out more
If you are considering setting up as a pharma consultant, join PharmaMedic Consultancy’s managing director, Malcolm Barratt-Johnson, for a free breakfast webinar on 20 April (8am-9am). This briefing will cover the pros and cons of different types of company structure, tax implications and reclaiming VAT. It will also delve into IR35 considerations, with particular reference to consultants.
Guest speaker Simon Wyndow, All Med Pro’s life sciences insurance manager, will also explain the details of Professional Liability, Public Liability and Employer’s Liability insurance.
There will be an opportunity to ask questions after the presentations.
Register here and, if you cannot join us on the day, you will be sent a link to view the recording after the event.
PharmaMedic provides interesting, flexible work for consultants in medical, regulatory affairs and other areas of pharmaceutical expertise. To learn more about joining our network of consultants, click here and arrange an initial discussion with one of our team.