Halifax has adjusted its affordability and income criteria for contractors who work on an employed basis to reflect changes to government tax legislation under IR35.
IR35 rule changes came in this April to ensure contractors paid the correct tax if the work they carried out for a company resembled employment.
Under IR35, a person can be deemed as employed based on conditions including how easily they can be substituted, the provision of their equipment and how exposed the worker is to financial risk.
Halifax’s amendments are effective from 9 July and mean contractors can be treated as either employed or self-employed for income verification depending on their circumstances.
The general definition of a contractor includes those whose income comes from a contract, they pay their own tax, or they are employed via an umbrella company that deducts their tax, or they are workers who are essentially employed but are on a fixed or short-term contract.
Borrowers will be treated as self-employed by Halifax if they pay their own tax, they have more than one contract, or if they have set up a limited company which employs other contractors.
In this instance, income verification will remain in line with existing self-employed policy.
Halifax will deem clients as employed if tax is paid on their behalf by the company they work for or they are employed by an umbrella firm that deducts tax.
Borrowers will also be considered employed if they earn more than £500 a day or £75,000 per year. They are also classed as employed if they are IT contractors on any income, regardless of the tax structure or if they consider themselves to be self-employed.
This follows a recent ruling where an IT contractor working for Nationwide had to pay £74,523 in income tax and National Insurance Contributions after losing an appeal to be deemed self-employed.
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The only exemptions for those earning more than £500 a day, £75,000 a year or IT contractors will be borrowers with more than one contract or those who have set up a limited company that employs other contractors.
Customers will also be considered employed if they have 12 months or more continuous employment, with six months of the contract remaining. People who have two years of continuous services in the same type of employment will also be treated as employed, as per existing Halifax criteria.
Contractor income verification
Where a contractor is considered employed for income verification, this will need to be checked either with a copy of their latest contract and payslip, or bank statement if a payslip is not issued.
The income will be calculated based on a 46-week year.
The lowest figure of either the calculated gross value of the contract or income will be used for affordability.
Those who work on a fixed or short-term contract or through an agency where tax is deducted by the employer who is not an IR35 umbrella firm will have to show their latest payslip to evidence income or last three payslips if other income is being used.
Members of the construction industry must provide the last three months’ payslips and corresponding bank statements, and an average will be calculated.
There will be no changes to income verification for borrowers on a zero hours contract.
Updates will apply to full applications submitted from 9 July. Any decision in principle entered before this date then submitted as a full application after Friday will be subject to the new criteria.
Further advances submitted after this date will also be subject to the changes.
By Shekina Tuahene
Source: Mortgage Solutions
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