IR35 first time buyers self-employed mortgage
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The start of the tax year saw changes to the way some contractors pay tax under ‘IR35’ rules, and they are not without controversy.

The Association of Independent Professionals and the Self-Employed (IPSE) describes the IR35 changes as a “disaster” in the public sector, and claims they are already proving to be “just as devastating” in the private sector.

Under IR35, also known as off-payroll working rules, contractors who would have been an employee if they were providing services directly to a client, pay broadly the same income tax and National Insurance contributions as employees.

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Besides tax implications, the IR35 rules are having an impact on some mortgage applications.

Alan Overy remarks that with the reviews to IR35, an extra layer of scrutiny is necessary to establish if a person is “really an employee or is working for themselves as a true contractor”.

“Each lender will apply their own criteria and tests but it mainly boils down to how the individual pays their tax and the level of autonomy they have from the company in terms of their hours and location,” Overy adds.

Halifax for example, treats contractors as employed for income verification purposes if tax is paid by the company they work for, or they are employed via an umbrella company who deduct tax.

Alternatively, contractors can be treated by the lender as employed if they earn more than £500 a day or £75,000 a year, or are an IT contractor on any income, irrespective of whether they pay their own tax or class themselves as self-employed, with exceptions.

Mortgage Broker Tools’ chief executive Tanya Toumadj remarks that the changes could limit affordability based on income and structure.

“For contractors, previously lenders would take the day rate and turn it into a gross annual amount, using an assumption on the number of weeks’ work, usually 46 weeks.

“Now… the umbrella company will be [deducting] the tax and therefore affordability would decrease.”

As Qdos Contractor explains, umbrella companies act as a middleman and provide a payroll service to contractors. Additionally, some clients may require any contractors that come under IR35 rules to use an umbrella company.

An April survey by Qdos of contractors’ experience of IR35 reform found most (64 per cent) were given the option to continue working via an umbrella company.

When it comes to applying for a mortgage, Accord’s Alvarez observes how lenders’ requirements differ on the treatment of contractors.

“Some lenders will accept contractors, some won’t, and some will accept them under certain circumstances. And they have different requirements about how long somebody needs to have been in that type of work and what evidence they have to support that income,” says Alvarez.

According to Chris Sykes many lenders require a client to have one to two years’ experience of contracting under an umbrella company arrangement, even if they were to have years of contracting experience through different structures, treating them more like a newly self-employed individual.

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Sykes says: “We have seen some examples where clients have tried to remortgage and have seen their affordability drop, with some lenders able to consider these new structures.

“But where previously a lender may have taken a view of £500 per day x 5 days x 46 weeks, now some will look at it as £500 per day, but take into account the umbrella company costs of 13 per cent, for example; so £435 a day x 5 days x 46 weeks. This could heavily affect someone’s affordability and borrowing power.”

Alex Beavis notes the implication of falling inside IR35 can reduce net income by up to 25 per cent.

“Where an application is on a more complex area of criteria such as this, using a mortgage helpdesk can assist with the initial placement of a case. Once a potential lender has been identified, then contacting the lender’s business development manager and using their knowledge and expertise can help,” Beavis adds.

“By talking the case through before submission, the lender’s BDM will know how best to present the adviser’s case and any additional information which may need to be provided to support a client’s application.”

Clydesdale Bank, for example, updated its lending criteria for contractors after IR35 rule changes.

In June the bank announced it would accept contracts that fall within IR35 rules, as well as contract income received via a payroll services (umbrella) company.

The lender’s announcement continues: “When a contractor is paid via an umbrella company, or falls inside IR35 and receives payslips, we need to see the last two months’ payslips, in addition to standard documentation.

“Any statutory employer costs (including employer NI contributions and Apprenticeship Levy) and any payroll service costs are deducted from gross pay before we multiply gross pay by 46 weeks.”

Gordon Hunter says they have seen more limited company contractors switch to umbrella companies, although such structures can create paperwork problems in the mortgage application process.

“If a contractor is now operating under an umbrella company for payroll, the payslip issued by the umbrella company usually states national minimum wage plus a bonus or commission payment to make up the difference. This is primarily due to the umbrella trying to keep employer costs, such as pension contributions, to a minimum,” Hunter adds.

“The problem is that lenders tend to look for the payslips and contract to match, with the day rate stated on the payslip rather than the breakdown to minimum wage and commission.”

Simon Butler says IR35 creates “further complexities” that some high street lenders are “not equipped to deal with”.

“Since April we have found that more people are overall concerned that these lenders will understand their working status even less, especially for those who have been contracting for themselves and moving inside of IR35 and now working through an umbrella.

“Essentially, mixing a history of self-employment via a limited company to the present day when monthly payslips are received,” says Butler.

But Hunter says some lenders are now accommodating to contractors switching from a limited company to an umbrella, “by flexing their lending criteria to facilitate umbrella arrangements, in recognition that these are still the same highly skilled mobile contractor clients as the ones who previously used their limited company contractor mortgage criteria”.

Hunter also notes some lenders, such as Skipton Building Society, do not differentiate between contractors operating through a limited company and those operating through an umbrella company, and will still use the contract day rate value to assess income.

And according to TSB, provided the applicant is on a day rate contract and income can be evidenced as per its standard policy for day rate contractors, they do not differentiate between how a business is set up.

A spokesperson for the bank says that any contracts provided to evidence income would need to show the name of the applicant personally, irrespective of whether there is an umbrella or limited company.

“There isn’t a one size fits all approach when considering contractors,” remarks Andrew Chalton, private client director at broker LDNfinance, which works with a large number of self-employed contractors mostly in the IT and financial services sectors.

“Therefore to our benefit we are able to lean upon our vast network of specialist lenders, which isn’t limited to your typical high street banks.

“As changes occur to taxation law, the requirement for a specialist broker becomes even more apparent as a fundamental tool to navigating an ever-changing and complex market.”

By Chloe Cheung

Source: FT Adviser

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