The start of the tax year saw changes to the way some contractors pay tax under \u2018IR35\u2019 rules, and they are not without controversy.<\/p>\n\n\n\n
The Association of Independent Professionals and the Self-Employed (IPSE) describes the IR35 changes as a \u201cdisaster\u201d in the public sector, and claims they are already proving to be \u201cjust as devastating\u201d in the private sector.<\/p>\n\n\n\n
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.<\/p>\n\n\n\n
Get in touch with\u00a0UK Contractor Mortgages<\/a><\/strong>\u00a0today to discuss your Buy to Let & Residential Mortgage requirements.<\/em><\/p>\n\n\n\n Besides tax implications, the IR35 rules are having an impact on some mortgage applications.<\/p>\n\n\n\n Alan Overy remarks that with the reviews to IR35, an extra layer of scrutiny is necessary to establish if a person is \u201creally an employee or is working for themselves as a true contractor\u201d.<\/p>\n\n\n\n \u201cEach 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,\u201d Overy adds.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n Alternatively, contractors can be treated by the lender as employed if they earn more than \u00a3500 a day or \u00a375,000 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.<\/p>\n\n\n\n Mortgage Broker Tools\u2019 chief executive Tanya Toumadj remarks that the changes could limit affordability based on income and structure.<\/p>\n\n\n\n \u201cFor 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.<\/p>\n\n\n\n \u201cNow\u2026 the umbrella company will be [deducting] the tax and therefore affordability would decrease.\u201d<\/p>\n\n\n\n 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.<\/p>\n\n\n\n An April survey by Qdos of contractors\u2019 experience of IR35 reform found most (64 per cent) were given the option to continue working via an umbrella company.<\/p>\n\n\n\n When it comes to applying for a mortgage, Accord\u2019s Alvarez observes how lenders\u2019 requirements differ on the treatment of contractors.<\/p>\n\n\n\n \u201cSome lenders will accept contractors, some won\u2019t, 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,\u201d says Alvarez.<\/p>\n\n\n\n According to Chris Sykes many lenders require a client to have one to two years\u2019 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.<\/p>\n\n\n\n Get in touch with us today to speak with the UK\u2019s\u00a0Best Contractor Mortgage Broker<\/a><\/strong>.<\/em><\/p>\n\n\n\n Sykes says: \u201cWe 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.<\/p>\n\n\n\n \u201cBut where previously a lender may have taken a view of \u00a3500 per day x 5 days x 46 weeks, now some will look at it as \u00a3500 per day, but take into account the umbrella company costs of 13 per cent, for example; so \u00a3435 a day x 5 days x 46 weeks. This could heavily affect someone\u2019s affordability and borrowing power.\u201d<\/p>\n\n\n\n Alex Beavis notes the implication of falling inside IR35 can reduce net income by up to 25 per cent.<\/p>\n\n\n\n \u201cWhere 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\u2019s business development manager and using their knowledge and expertise can help,\u201d Beavis adds.<\/p>\n\n\n\n \u201cBy talking the case through before submission, the lender\u2019s BDM will know how best to present the adviser\u2019s case and any additional information which may need to be provided to support a client\u2019s application.\u201d<\/p>\n\n\n\n Clydesdale Bank, for example, updated its lending criteria for contractors after IR35 rule changes.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n The lender\u2019s announcement continues: \u201cWhen a contractor is paid via an umbrella company, or falls inside IR35 and receives payslips, we need to see the last two months\u2019 payslips, in addition to standard documentation.<\/p>\n\n\n\n \u201cAny 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.\u201d<\/p>\n\n\n\n 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.<\/p>\n\n\n\n \u201cIf 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,\u201d Hunter adds.<\/p>\n\n\n\n \u201cThe 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.\u201d<\/p>\n\n\n\n Simon Butler says IR35 creates \u201cfurther complexities\u201d that some high street lenders are \u201cnot equipped to deal with\u201d.<\/p>\n\n\n\n \u201cSince 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.<\/p>\n\n\n\n \u201cEssentially, mixing a history of self-employment via a limited company to the present day when monthly payslips are received,\u201d says Butler.<\/p>\n\n\n\n But Hunter says some lenders are now accommodating to contractors switching from a limited company to an umbrella, \u201cby 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\u201d.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n \u201cThere isn\u2019t a one size fits all approach when considering contractors,\u201d 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.<\/p>\n\n\n\n \u201cTherefore to our benefit we are able to lean upon our vast network of specialist lenders, which isn\u2019t limited to your typical high street banks.<\/p>\n\n\n\n \u201cAs 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.\u201d<\/p>\n\n\n\n By Chloe Cheung<\/em><\/p>\n\n\n\n Source: FT Adviser<\/a><\/p>\n\n\n\n