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Majority of lenders accepting applications from self-employed borrowers

New research from the Intermediary Mortgage Lenders Association (Imla) shows that most – 88% – of lenders are willing to extend funds to the self-employed.

Imla asked 24 lenders a series of questions regarding underserved borrowers, finding that, “Despite ongoing consumer concerns that only borrowers with straightforward incomes and perfect credit histories can access mortgage lending,” many lenders are in fact open to borrowers with more complicated financial histories.

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Specifically related to the self-employed, Imla discovered that criteria here has changed over the last 18 months.

The report show that 16% of lenders have reduced the period for which earnings must be shown, with 21% disregarding the 2020/21 tax year in favour of pre-covid accounts. And 25% of lenders will accept predicted revenues on these applications.

Moreover, 21% of lenders have changed their criteria for the sake of borrowers on furloughed income or those who had to go on a mortgage holiday, and 29% of lenders have altered their criteria to accept bonus, overtime or commission income in mortgage applications.

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Overall, 71% of lenders will consider borrowers with ‘irregular’ income and 63% will accept applications for multiple borrower products. Just under half, meanwhile – 46% – will look at potential borrowers with credit impairments in their history.

And regarding lenders themselves, 67% said that, since the start of the pandemic, they have invested in expanding their underwriting teams and 42% have grown their overall staff.

Just under half – 46% – have made investments in technology, meanwhile.

Imla executive director Kate Davies says: “2020 was the year everything was turned upside down – including the mortgage sector.

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“Lenders and intermediaries responded very well given the difficult circumstances and were able, in a remarkably short timescale, to continue to offer support and services to customers. This included millions who accessed payment holidays. This meant that, for a brief period, the range of mortgages offered needed to be reduced, but lenders are back in business with a full and very competitive range of products back on the market.

“Lenders are also very aware that, as we emerge from the worst of the crisis, borrowers who may previously have had non-standard financial circumstances may now have even more complex profiles. Lenders have responded to this – and there are now around 5,000 mortgage products on the market.”

By Gary Adams

Source: Mortgage Finance Gazette

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IR35 changes driving contractors out of self-employment

More than a third (35 per cent) of contractors have left self-employment since the changes to IR35, either moving into permanent employment, retiring, working overseas or simply not working.

According to the Association of Independent Professionals and the Self-Employed (IPSE), of those who remain, more than a third (34 per cent) are now working through unregulated umbrella companies and another third (36 per cent) are working through engagements deemed ‘inside IR35’.

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What is IR35?
IR35 or the off-payroll working rules can apply if a worker or contractor provides their services through their own limited company or another type of intermediary to the client, but who would be an employee if the intermediary was not used.

Self-employed contractors typically work under this kind of arrangement to reduce the tax they pay. Such workers are called ‘deemed employees’ by HMRC.

The IR35 rules aim to make sure that a worker, who would have been an employee if they were providing their services directly to the client, pays broadly the same tax and national insurance contributions as an employee.

In the past the contractor decided whether their working arrangements fell inside or outside IR35. But since April 2021, their employment status has been determined by the client. If the client decides that IR35 should apply to the engagement, payment to the contractor will be taxed at source.

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Financial consequences
IPSE says that working inside IR35 not only leaves contractors essentially in no-rights employment; it also has significant financial consequences. Four out of five (80 per cent) contractors working inside IR35 said they had seen a drop in their quarterly earnings – by an average of 30 per cent. A quarter even said their income had dropped by more than 40 per cent.

A significant problem seems to be the implementation of the rule changes by clients. Under the new rules, clients are now required to give contractors a Status Determination Statement (SDS) to confirm their IR35 status, but nearly two out of five (38 per cent) said their clients had not done this.

One in five (21 per cent) contractors said their clients had also blanket assessed all engagements as inside IR35, while one in 10 (11 per cent) said their clients had blanket banned contractors altogether. Another 34 per cent said they were now having to work through unregulated umbrella companies for their clients.

One in four (23 per cent) of all contractors working through umbrella companies say they are dissatisfied with their umbrella company, compared to 46 per cent who are satisfied.

One key area of concern is business expenses, which most contractors now cannot claim from their umbrella company: 55 per cent were dissatisfied with this. Another key concern is the cost of employer’s National Insurance: 33 per cent said they were dissatisfied with this – most likely because many umbrella companies are passing this cost onto contractors through a deduction from their day rate.

‘Devastating impact’
Andy Chamberlain, director of policy at IPSE, said: “Contractors are the most productive part of the crucial self-employed sector, which overall contributes more than £300bn to the UK economy every year. Not only that: they are absolutely vital for economic recovery, providing invaluable flexible skills to businesses getting back on their feet and adapting. But just when this sector is needed most, it has been hamstrung by the changes to IR35.

“This research shows the devastating impact the changes to IR35 have had on contractors, needlessly compounding the financial damage of the pandemic and the unnecessary gaps in support. Now, just when contractors are needed most – amid mounting labour shortages across the UK and particularly in haulage – government decisions have driven out a third of the sector.

“Contractors now find themselves with myriad different and complex ways of working – each with its own pitfalls. They are now divided between those still managing to work outside IR35, those working through unregulated – and sometimes unscrupulous – umbrella companies, those working inside IR35 for less pay and with no rights, and others now on client or agency payrolls.”

By Emma Lunn

Source: Mortgage Solutions

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HGV crisis: why IR35 tax changes made driver shortages worse

It’s no secret that the UK is short of HGV drivers. But while a combination of Brexit and Covid-19 have exacerbated the issue, there’s another reason behind it: IR35 tax changes.

However, IR35 doesn’t just affect lorry drivers, it affects contractors throughout the UK. Here’s what it is, what it means for all ‘off-payroll’ employees and why it’s made a precarious situation even worse.

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What is IR35?

IR35 is basically a set of tax rules.

The rules aim to weed out what’s called ‘disguised employment’. This happens when someone works as a contractor (for instance, through their own limited company) but fulfils the role as any other permanent employee hired by the company would.

Disguised employment often happens because of the tax benefits it brings.

For employers, it means avoiding National Insurance (NI) contributions. It also means employers don’t have to provide regular staff benefits (like pension contributions).

There are benefits for the contractor too. Limited companies are ‘tax efficient’ partly because you take home less pay (and therefore pay less tax). You can then bulk out your income through dividends which are exempt from National Insurance.  

The government hopes that IR35 stamps out these practices in order to raise more revenue through otherwise ‘lost’ taxes.

How does IR35 work?

To distinguish between disguised employment and genuine self-employment, there are two types of status within IR35.

1. Inside IR35

This is where you’re considered an employee. For example, you use equipment provided by the company you’re contracted to. It’s also recognised as working on a rolling contract basis rather than completing one-off projects for a range of clients.  

If you’re considered to be working inside IR35, you and the company you contract for are subject to all the usual taxes, such as Income Tax and National Insurance.

Outside IR35

This is considered genuine self-employment. This is broadly accepted as being in control of where and when you work, and usually for more than one client at a time.

It can also mean using your own tools and equipment in order to complete the work.  

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So, how does IR35 affect HGV drivers?

IR35 affects HGV drivers for a couple of reasons.

The first, is that many are (or were) employed by agencies as freelancers or contractors. But, these drivers would use agency lorries and be given specific work schedules.

This means the drivers fall inside IR35 rules and (technically) work for their agencies as they have no control over their schedules and aren’t driving their own lorries.

As it stands, these agencies work to tiny margins (around 2% to 3%). Some agencies have started to employ drivers inside IR35 and provide all the workplace benefits that go with it. For others, it’s become an unsustainable business model.

Secondly, for drivers, it means losing the flexibility of contract work and being forced into employment terms they may not be happy with (including less take-home pay).

Research by the Association of Independent Professionals and the Self-Employed (IPSE) seems to support this. In its study, IPSE found that only 17% of contract drivers would actually choose to seek an employed role.

Half of contractors planned to stop working in the UK while 24% said they would try and find work in another sector.

A reasonably large minority (12%) said they would stop working completely and 11% planned to retire instead.

Not only that, the ins and outs of IR35 are complex and often subject to interpretation. This has made many agencies and firms worry about getting it wrong and facing penalties as it’s down to them to work out whether someone is working inside or outside the new rules.

All in all, IR35 is part of a bigger and more complicated picture. Yet there are few doubts that it’s contributed to the HGV crisis that shows little sign of getting better anytime soon.

By Anne East

Source: The Motley Fool

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Over half of contractors plan to move into permanent employment to escape IR35 reforms

Over half (56%) of contractors are planning a move to permanent employment due to the IR35 reforms which came into effect earlier this year.

The study by leading small business insurance provider Simply Business – which spoke to over 250 contractors – also revealed that 91% of contractors say the IR35 reforms will impact their business. Of those, two thirds (55%) say it will have a significant impact.

With the IR35 reform proving a costly headache, half (50%) believe the changes should be scrapped altogether, and two in five (38%) say the changes need rethinking.

As the country looks to bounce back from the impact of the pandemic, a staggering 98% of contractors believe the reform will have a negative impact on economic recovery, with two in five (40%) believing a less flexible workforce – as more contractors go permanent – will harm the UK.

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It comes as previous research by Simply Business revealed one third (32%) of contractors expect to miss out on over £20,000 in take-home pay as a result of the reform – while one in five (20%) expect to miss out on between £10,000 and £20,000 each.

Contractors form a crucial part of the five million self-employed people in the UK. Kevin Neal and Bill Cunnew are just two out of thousands of contractors in the UK considering the long-term effect and shattering financial loss surrounding the changes to IR35.

Kevin Neal, IT contractor comments: “The IR35 reform means I have lost an eighth of my pay to tax, fees and pension, which will have a substantial impact on my income. I feel persecuted for doing nothing more than trying to earn a living. I pay my taxes, I always have. The Inland Revenue should focus on those who do not instead of making sweeping changes that affect everyone.”

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Bill Cunnew, IT contractor notes: “I contracted for 26 years through my own limited company, I earned good rates but due to IR35 the banking and insurance sector has just stopped taking LTD company contractors. After one year out of work I was forced to take a permanent job on a lot less money, as a result I am now paying about 25% of the tax I paid as a contractor.”

Alan Thomas, UK CEO at Simply Business, comments: “Six months on, the IR35 reforms have impacted countless contractors across the UK, and have seen many miss out on a substantial part of their take-home pay. Contractors are a vital part of the economy, and with one in three expecting to miss out on over £20,000, it’s no surprise to learn that more than half intend to make the switch to permanent employment.

“We know the last 18 months have been especially difficult – many of whom were left without government support – and that despite IR35’s delay, simple, easy-to-understand guidance was difficult to find.

“Contractors should be seen as an incredibly important part of our workforce. SMEs, self-employed and freelancers in the UK contribute trillions of pounds to the economy, and will be crucial to our recovery. Now more than ever it’s vital that we support our self-employed communities – this is why we’ve launched a free IR35 hub to offer guidance to contractors affected by the reform.”

Source: LLB

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Updates that contractors should know about – IR35 reform

The government finally introduced IR35 reform in the private sector six months ago. At the time, a Simply Business survey revealed that nearly a third of contractors expected reform to cost them more than £20,000.

Medium-sized businesses don’t have a formal IR35 process in place

According to a survey from tax advisory firm BDO, more than half of medium-sized businesses don’t have a formal process in place for assessing a contractor’s employment status (small businesses are exempted from the change).

55 per cent of these firms said that they’ll worry about IR35 once their business gets back to normal after Covid-19.

But despite HMRC’s ‘light touch’ on compliance for the first 12 months of private sector reform, BDO warns that businesses should adapt quickly: “Businesses who do not comply will still need to pay tax and could face significant penalties. HMRC has shown that it will not turn a blind eye to non-compliance”.

Contractors will pay more in tax next year

The government is hiking National Insurance by 1.25 per cent for employees, employers, and the self-employed from April 2022.

The government has also announced that it’ll be hiking the dividend tax rate by 1.25 percentage points from April 2022, too.

These increases stack up more challenges for a sector already struggling with IR35 reform.

Matt Fryer tells Contractor UK that umbrella company contractors will be hit twice as hard by the National Insurance hike, “where the contract rate includes the employer costs which is predominantly employer’s NIC.”

HMRC is checking ‘payroll compliance’

HMRC has promised that it won’t launch enquiries into personal service companies (PSCs) unless it suspects that they’re deliberately breaking the rules.

But Nigel Nordone explains for Contractor UK that two contractors he supports are currently undergoing PAYE compliance checks. This involves HMRC checking payroll to clarify how contractors are paying themselves.

Nordone explains that this could give HMRC a back-door to investigating IR35 compliance, without breaking its promise to refrain from launching enquiries unless foul play is suspected.

Even government departments can’t get IR35 right

According to FT Adviser, three government departments have been given huge bills by HMRC for not applying IR35 rules correctly. While private sector IR35 reform was only introduced in April 2021, the public sector has been grappling with the changes since 2017.

  • HM Courts & Tribunal Service paid £12.5 million to HMRC in 2020-21 relating to incorrect status determinations between 6 April 2017 and 5 April 2020
  • the Department for Work and Pensions paid £87.9 million to HMRC in 2020-21 for historic errors from 2017-2020, although a liability for 2020-21 was agreed too
  • the Home Office paid HMRC £29.5 million for incorrect assessments, as well as £4 million for ‘careless’ application of IR35 rules

Seb Maley questions who might be next, adding: “given that HMRC’s fundamentally flawed IR35 tool, CEST, was used to decide the IR35 status of contract workers, I’m not in the least bit surprised that mistakes have been made.”

He urges businesses to make sure IR35 compliance is high in their priorities.

Roles can morph from inside to outside IR35 – so be careful

Contractor UK quotes an IT contractor as saying that one client they were hoping to work with changed the opportunity from inside to outside IR35 almost overnight.

They explained: “Possibly [due to not many candidates going forward], they might have changed the working practices, and then reassessed the contract. But I wouldn’t hold my breath on the [change to working practices] actually.”

If you notice any opportunities changing like this, Graham Webber, a director at WTT Consulting, urges caution: “a simple re-label to ‘outside’ is going to be a hard hurdle to overcome should HMRC [subsequently] ask any questions”.

CEST users are being shown an ‘undetermined’ status

Finally, the Express has reported on HMRC’s CEST data released in June 2021. CEST – or Check Employment Status for Tax – is HMRC’s tool that aims to provide a view on a particular worker’s employment status.

Both contractors and the clients they work for can use the tool to help them work out IR35 status.

But HMRC’s June data shows that 210,100 contractors from November 2019 to May 2021 were shown an ‘undetermined’ status, which suggests that many contractors are still not getting clarity over their status.

The Express further reports on a discrepancy in the data, quoting Matt Fryer: “According to CEST data, 49-56 per cent of all contractor roles clearly fall outside of IR35, with another 19-21 per cent in a grey area that the tool is unable to determine.

“Market data from Jobfeed, however, indicates that only 26 per cent of contractor roles are currently being advertised as outside IR35 (w/c June 7).”

Fryer questions where all of these outside IR35 roles are, suggesting that businesses might not have faith in the processes they’ve put in place to determine IR35 status – linking back to the first point in this article.

By Sam Bromley

Source: Simply Business

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IT contractor demand ‘remained very high’ in August

Roaring demand for IT contractors was a touch fainter in August 2021, an index shows, but still came in at an extraordinarily high level not seen since early 1998.

In fact, given 50.0 signals monthly growth, the market adjusting from 71.3 to 71.0 indicates IT contractor demand “remains very high,” the index compilers, the REC, told ContractorUK.

The staffing body’s CEO Neil Carberry said August experienced “record levels” of candidate shortages, “super-high” rates of temp billings growth and “fast-rising” daily rates.

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‘Mercenary contractors’

Online, such premiums inspired a post last month on “rate-chasing contractors,” with an agent saying his client called contractors “mercenary” after they quit for better pay elsewhere.

But the agent, who places transformation and change contractors at London-based insurance companies, suggested that end-users themselves had only recently been exploiting record contractor availability.

“A lot of clients were keen to take advantage of the excess contractors during the pandemic, and rates were slashed so contractors had to flex if they wanted to pick up work.

“However [now, just] a matter of months [later],” the agent said, “the market has flipped on its head and there is an under-supply of quality talent on the market, driving rates back up.”

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‘Still a job-seeker’s market’

Writing in the August Report on Jobs by the Recruitment & Employment Confederation (REC), its co-authors KPMG confirmed that “it remains a job-seeker’s market.”

And the professional services firm’s Clare Warnes hinted that while the pendulum of demand may of course swing back to favour end-users, it will remain with candidates for the foreseeable.

“The winding down of the furlough scheme at the end of September…potentially bringing more job-hunters to the market, could…add fuel to the labour shortage fire,” she said.

‘Tight labour market for the next decade’

Also writing in the report, the confederation’s Mr Carberry said a number of factors meant that the labour market would “remain tight for several years to come.”

Taking to LinkedIn after the report’s publication, the staffing boss appeared to upgrade his forecast, saying that the tight labour market would be around for “the next decade.”

“Attracting and retaining staff”, continued Mr Carberry, “requires a serious assessment [by end-users] of why workers want to work with the firm; from management approaches to facilities, as well as pay.”

‘Cannot expect contractors to work for sub-market rates’
Agreeing that money remains a vital part of the mix, the London insurers’ agent said: “Clients have to be fair, competitive, and flexible with their rates and if not, cannot expect contractors to work on rates significantly under market rates.”

In August, automation testing was the only technology skill uniquely scarce in the IT contractor market.

Also in “short supply” according to REC agencies, on a temporary basis (but on a permanent basis too), were Development, Software Engineering, Technology/IT.

The agents said the full-time market was additionally short of applicants with Azure, C#, Data Science, Software, Digital, Social Media and CAD.

Source: Contractor UK

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Thousands of companies throughout the UK may be breaking IR35 rules

Thousands of companies throughout the UK may be breaking the IR35 rules when it comes to reviewing the status of the freelance contractors who work for them, say tax and advisory firm Blick Rothenberg. The warning comes at the end of National payroll week and Robert Salter a client service director with the firm.

Since April Companies are required to assess whether each contractor is working in a pattern which is ‘akin to that of an employee’ unless they are exempt from the IR35 requirements as small enterprises.

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Businesses are now legally obliged to account for PAYE and NICs on the invoices it receives from PSCs rather than simply paying them on a gross basis, where the contractor is held to be a ‘deemed employee’ of the end business. Failures by the businesses using freelance contractors in this regard can result in the business being liable to Interest and penalty charges in respect of the underpaid tax (with penalties potentially being as high as 100% in some scenarios. They must account for the PAYE which should have been accounted for and are liable to employee and employer NICs on the invoices.

Although the new legislation has been in place since April many businesses who are impacted by the IR35 changes are actually either (a) totally unaware of the new regulations, or (b) have not been able to invest in training staff vis-à-vis their obligations in this area and the obligations which one needs to meet, to protect the business from unwelcome tax and NIC charges.

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Whilst these shortcomings are inevitable given the pressures businesses have been experiencing with Covid and the underlying difficulties associated with the core regulations – which are hard to understand and apply in practice – such factors will not provide businesses with any meaningful ‘defence’ in the case of a formal Revenue enquiry into this area.

Moreover, businesses need to realize that HMRC teams have been staffed to specifically address this issue on a going forward basis, so the chance of receiving future enquiries in this regard are significant for most businesses.

On an going forward basis, businesses should – if they haven’t already – start reviewing the position of their contract employees and ensuring that these reviews are clearly documented. If this delayed review does highlight any problems, they should discuss the position with their advisors as a matter of urgency. If they don’t, they risk getting into even more problems and difficulties over the coming months and years.

By Barney Cotton

Source: Business Leader

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More than half UK SMEs delay adopting IR35 tax reforms

More than half of the UK’s small and medium-sized enterprises (SMEs) have not put in formal processes to adhere to changes to the IR35 rules, according to a new survey.

A survey from advisory firm BDO found 55 per cent of SMEs using contract workers say they will worry about IR35 reforms when businesses return to a more normal footing post-Covid.

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The IR35 rule changes came into effect five months ago, meaning all these firms are now susceptible to investigations from HM Revenue and Customs (HMRC).

HMRC has said there will be a so-called soft landing in the first year for those who do not comply with the new rules, but that a taskforce will soon be launched to clamp down on tax avoidance.

The IR35 changes force companies treat self-employed contractors as employees for tax purposes, without having to provide standard employment rights such as statutory sick, maternity and redundancy pay.

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John Chaplin, employment tax partner at BDO, said : “Businesses who do not comply will still need to pay tax and could face significant penalties. HMRC has shown that it will not turn a blind eye to non-compliance, so businesses who do not have a formal IR35 process in place should immediately rethink their affairs.

“At a time when ESG is becoming increasingly important for businesses, there is an expectation for decision makers to come forward and show that good governance and tax compliance is important to them.

“Failing to comply with IR35 certainly shows weak governance and can prove to be an expensive mistake. Unless a business can show that it has taken ‘reasonable care’ over its IR35 responsibilities, penalties can rack up pretty quickly.”

By Stefan Boscia

Source: City AM

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IR35 warning: ‘Huge discrepancy’ discovered in HMRC data

IR35 tax complications continue to hit freelancers and contractors and while the Government aims to mitigate this, its tools prove to be imperfect. Analysis of recent data from HMRC found discrepancies in the private contractor industry.

HMRC released data on its Check Employment Status for Tax (CEST) tool usage in late June, which was created to help people find out if they should be classed as employed or self-employed for IR35 tax purposes. The results of this data showed thousands of self-employed workers are still struggling with the changes introduced in April 2021.

The CEST data showed that while 499,974 were deemed outside IR35, and 308,176 were deemed inside, 210,100 users were categorized as “undetermined”.

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At the time, many experts argued this showed the tax changes were too complicated to manage, even for the Government itself.

On top of this, Matt Fryer, the Head of Legal Services at Brookson Legal, identified a worrying discrepancy.

Mr Fryer said: “There is a huge discrepancy between the CEST usage data and the number of private sector contractor jobs being advertised as outside of IR35.

“As demand for skilled labour begins to outstrip supply, hiring businesses that are unable to guarantee outside IR35 status for these contractors will struggle to recruit the talent they need for economic recovery.

“According to CEST data, 49-56 percent of all contractor roles clearly fall outside of IR35, with another 19-21 percent in a grey area that the tool is unable to determine.

“Market data from Jobfeed, however, indicates that only 26 percent of contractor roles are currently being advertised as outside IR35 (w/c June 7).

“This is a worker’s market, with REC reporting on rapid rises in hiring and intent to hire for temporary roles, coupled with a shortage of skilled talent.

“As the economy picks up, businesses that require skilled contractors will need to clearly demonstrate that they can provide roles outside of IR35 to beat the competition.

“The question is: why are more of these roles not being advertised already?

“One answer might be that many businesses do not have faith in the solutions that they put in place to meet the deadline.

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“This is where we will see hirers who have planned well begin to reap the rewards of their diligence.”

Struggling freelancers may be able to receive support through SEISS at the moment, as claims for the fifth and final set of grants can be made up until September 30, 2021.

To be eligible for these grants, claimants must be a self-employed individual or a member of a partnership.

They must also have traded throughout the 2019 to 2021 tax years.

Eligible claimants must also have submitted their 2019 to 2020 tax return on, or before, 2 March 2, 2021, have trading profits of no more than £50,000 and are at least equal to their non-trading income.

For the fifth grant, claimants will also need to provide details on their turnover figures so the Government can calculate how much money should be paid out.

Claims are made through the Government’s website.

Following this, the Government will pay grants within six working days, so long as claimants are eligible.

HMRC should only be contacted if payments do not arrive within 10 working days.

By CONNOR COOMBE-WHITLOCK

Source: Express

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How IR35 changes have affected mortgage affordability

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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