IR35 update: Off-payroll working rules changes – why you need to act now
IR35 off-payroll working rules will now finally become law for medium and large-sized private companies on 6 April 2021, following its previous postponement due to the impact of COVID-19. This will leave many private companies that employ contractors liable to pay their tax and national insurance contributions from this date.
Our advice is to act now and assess your working practices to protect your company and avoid any backdated demands for payments and fines for delays and late submissions.
What are IR35 Off-payroll Working Rules?
This legislation aims to stop ‘disguised employment’. These rules can apply if a worker provides their service through an intermediary. An intermediary is usually the worker’s own personal service company, it could also be a managed service company, a partnership or an individual.
Whilst IR35 has existed since 2000 and off-payroll reforms came into force in the public sector in 2017, these will now be rolled out into the private sector, for medium and large companies from 6 April 2021. These rules ensure that these workers, who would have been an employee if they were providing their services directly to the client, pay broadly the same tax and National Insurance contributions as employees.
This legislation puts the burden of responsibility on the entity that pays the contractor or freelancer. When these rules apply, tax and National Insurance contributions must be paid direct to HMRC.
Who is affected BY IR35 off-payroll working rules?
If you are a medium or large-sized private organisation or non-government organisation, these rules will apply to you. You are likely to be affected by these rules, if you fall into any of the following categories:
- A worker who provides their services through their intermediary
- A client who receives services from a worker through their intermediary
- An agency providing workers’ services through their intermediary
- Particularly recruitment agencies
What will the impact be to your company?
These new rules force private sector companies to be responsible in deciding whether a freelancer or contractor who provides the services through an intermediary, has the correct employment status. IR35 is a complex legislation, with many factors to consider when deciding this status. Ultimately, you need to be able to make this decision accurately, and if a contractor or freelancer does fall within these rules, be able to correctly pay their tax and National Insurance contributions for the work undertaken.
Additional costs incurred could include adaptation to the changes, training staff, making IT changes and implementing processes that allow the operation of payroll or payments made to an external Payroll Service Company. Ongoing costs for these agencies could also include accounting for and reporting the PAYE liabilities through Real Time Information (RTI).
Preparation for these changes is not an easy task and is time-consuming, it could typically take a medium to large organisation a month to review existing contracts. Additionally, businesses may not have adequate information regarding the working practices and may rely on their contractors to give an opinion on their IR35 status. You have until April 2020 to determine, having undertaken an assessment of your contractors IR35 status.
This can prove problematic, businesses are unlikely to make accurate assessments as the complex rules require a detailed understanding of case law, contracts and working practices.
You may decide to adopt a blanket approach and deem all to be ‘inside IR35’ regardless of their actual position as a cautionary measure. This may result in the loss of talented and reliable contractors and leave a company with a skills shortage. Already some major employers are reported to have informed contractors that they will only employ them as “on-payroll” employees in preparation for the IR35 legislation changes. this will lead to increased costs and potentially a reduction in the available workforce.
Additionally, workers have the right of appeal against any determinations and you are obliged to adhere to this appeals process, which ultimately would leave you still liable for such workers tax and National Insurance. Should the contractor disagree with the ruling, you will then have 45 days from the date of receiving the worker’s disagreement to respond. You should continue to apply the rules in line with their original determination during this time.
How to ensure you are protected for the IR35 legislation
The complex nature of IR35 and the problems that arise in determining IR35 status are often difficult to understand. Independent specialist advice and assessments will help to ensure you are fully prepared and clear of your responsibilities.
HMRC does provide an online Check of Employment Status Tool (CEST). Whilst this has now been updated as the previous version received significant criticism, it does rely on the accurate input of data and needs to be used in accordance with guidance. Furthermore, some questions the tool asks may require further explanation and it may not provide a definitive answer in more borderline or challenging cases. Data released by HMRC stated that in almost 20% of cases, it was unable to provide a correct determination.
Alexander & Co can provide detailed IR35 training and reviews, to assist in planning for these important changes, these include:
- A detailed explanation of the legislation and how this will impact you
- Provision of an action programme and timetable
- Providing judgement on how this will apply to your business and its impact to you
- Assistance to review existing contracts and to assess both working practices and written contracts to determine if current IR35 statuses are correct
- Assistance to ensure you are covered in the event of an investigation